Active portfolio management: justifications

Why active portfolio management might add value in an efficient market environment?

• Economic argument (logic)
• If investors only invested in passively managed portfolios, then actively managed portfolios would cease to exist. As a consequence, inefficiencies will arise in securities markets and the resulting profit opportunities will lure active managers back thus enabling them to outperform passively managed portfolios.
• (Incorrect description) If active managers were not able to consistently beat a passive investment strategy, investors would not be willing to pay high fees for active managers and funds under active management would cease to exist. Since there are many active managers, economic logic suggests they must be outperforming passive strategies.
• Empirical evidence
• Some managers have consistently produced excess returns relative to a passive strategy, suggesting skill rather than luck.