Active Management Four market insights we shared with US Congress

Opportunities to speak before Congress are rare. So, when US lawmakers invited Capital Group Vice Chair Jody Jonsson to share her perspective on aligning public policy with shifting market conditions, she welcomed the chance.
 

Appearing before the House Financial Services Subcommittee on Capital Markets, Jonsson urged lawmakers to preserve investor choice and spoke about the important role active management plays in ensuring the healthy function of capital markets. The committee was exploring whether current policy keeps up with market innovation, such as the recently introduced Trump Accounts, retirement-focused savings vehicles that are required to be invested in low-cost US equity index funds.
 

Jonsson’s testimony resulted from years of engagement and relationship building with lawmakers, staffers and regulators. Capital Group regularly engages with lawmakers to help strengthen capital markets, reduce costs, lower friction and modernise regulations so they make sense for today's investors and their advisers.
 

“Our advocacy is truly focused on generating public policy that supports the best possible outcomes for investors,” says Reagan Anderson, Senior Vice President of Government and Regulatory Affairs.
 

"When lawmakers have questions about active management, it's important that we're who they call," Anderson said. "We've spent years building relationships and providing investors' perspectives on issues that affect retirement security and long-term financial outcomes, and we make sure they know how many investors and advisers we represent in their districts."
 

Here are four insights Jonsson shared in her testimony to lawmakers:

1. Investor choice is essential
 

Investors have different objectives, life stages and risk tolerances, and public policy should preserve their ability to choose the approach that works best for them. That is why active and passive strategies both have an important role to play.
 

“No single investment approach, product or path to retirement security is right for everyone,” Jonsson told lawmakers. “Which is why investors should have access to a broad range of investment solutions, including active management, passive strategies and combinations of both.” 
 

The discussion comes at a time when the investment landscape is being impacted by the rise of passive investing, accelerating trading activity and growing market concentration. Over the past two decades, passive investing has grown to represent about two-thirds of US assets under management.

Jonsson cited target-date funds as an example of investments that demonstrate the power of investor choice. Since becoming retirement plan default investments in the US two decades ago, a variety of offerings tailored to investor time horizons and risk tolerance have been developed. “Some options are passive, some are active, and some are a combination,” Jonsson said.
 

While Trump accounts hold great promise for US investors, Jonsson noted that today they are limited to passive options. ”Similar to target date funds, these accounts could benefit investors further if there were both active and passive options.”

2. Cheaper is not necessarily safer
 

One common misconception is that passive investing is safer than active investing. While passive investments may be cheaper, with lower fees on average, lower fees do not necessarily equate to better outcomes.
 

For example, a passive fund in a declining market is guaranteed to fully participate in that decline. During the tech and telecom bubble in 2000 and the global financial crisis in 2008, passive investments fully participated in those market declines. “Passive means passive about risk, not just stock selection,” Jonsson told the committee.
 

Indeed, the growth of passive has also amplified some risks. For example, because passive strategies invest based on investor cash flows, they tend to follow market cycles all the way up and all the way down and invest in companies according to their weighting in the index. As a result, they can potentially give investors the greatest exposure to companies when valuations are at or near highs. Today, the 10 largest companies in the S&P 500 represent nearly 40% of the index, a level not seen since the mid-1960s. 

Unlike passive strategies, active managers can adjust portfolios in response to changing market conditions to help mitigate losses during periods of market stress.
 

“The case for passive investing is about cost — not risk,” Jonsson said in her testimony. “Conflating the two can mislead investors about the nature of what they’re buying. The most important measure to investors is value: the overall return to an investor net of fees.”
 

3. Active management supports healthy capital markets
 

Active investing also plays an essential role in the healthy functioning of markets. First, active managers play a critical role in price discovery, which is the process by which markets determine the value of a security at any given time. Because active managers make buy-and-sell decisions based on their assessment of a company’s prospects, risks and valuation, they help market prices reflect underlying economic realities.
 

“This process improves market efficiency and reduces mispricing,” Jonsson said. With fewer active managers engaged in price discovery — evaluating companies based on their underlying fundamentals — markets can become more influenced by short-term flows. “Active management isn’t just a part of the financial system; it’s a core reason the system works,” Jonsson stated.
 

Active management also helps direct capital to companies that drive economic growth, innovation and job creation.
 

4. Financial advice remains critical to investor success
 

Jonsson also highlighted the important role financial advisers play in helping investors navigate uncertainty, understand their options and stay focused on long-term goals.
 

During periods of market volatility, advisers can help investors manage their emotions and avoid making rash investment decisions that could potentially derail their long-term investment plans.