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Active vs. Passive Investing


Can we settle the debate?
It’s one of the first questions that comes up when the conversation moves to investing: “which do you think is better over the long-term: active portfolio management or passive portfolio management?” And it’s a question that I can answer with absolute conviction: it depends. Let’s examine the two.


Investors can select from two main investment strategies: active and passive portfolio management. Active portfolio management is exactly how it sounds: the portfolio manager (or team) focuses on outperforming an index by “actively” making buy/sell decisions, adjusting asset allocation ranges and employing other portfolio management techniques. Passive portfolio management on the other hand simply aims to replicate an index – not outperform and not underperform – replicate.

The other difference between the two is fees. Because active managers believe that they can outperform their benchmark, they generally charge more – I said generally but I probably could have said “almost always.”

The Latest Data

Turns out that there is an organization trying to settle this active vs passive debate once and for all: SPIVA – which stands for Standard & Poors Indices Versus Active.

Let me just repeat some bullets from their latest research report (you can see so much more at SPIVA):

The Past Year

During the one-year period ending December 31, 2016:

  • 66% of large-cap managers underperformed the S&P 500;
  • 89% of mid-cap managers underperformed the S&P Midcap 400; and
  • 86% of small-cap managers underperformed the S&P Small Cap 600.

The Past Five Years

During the five-year period ending December 31, 2016:

  • 88% of large-cap managers underperformed;
  • 90% of mid-cap managers underperformed; and
  • 97% of small-cap managers underperformed.

The Past 15 Years

During the 15-year period ending December 2016:

  • 92% of large-cap managers underperformed;
  • 95% of mid-cap managers underperformed; and
  • 93% of small-cap managers underperformed.

So, Then It’s Settled, Right?

You would think that with statistics like these, everyone would conclude that passive portfolio management trumps active portfolio management, right? Well not exactly.

Many suggest that experienced – defined as portfolio managers with at least 10-years of tenure – active managers have historically done better during volatile markets. And they reference a study by AMG that plots long-tenured, actively managed large-cap fund three-year rolling returns over the 20-year period ending March 31, 2016 against the S&P 500 Index.

This study shows that in periods when the market suffered declines greater than 10%, the median long-tenured active large-cap manager posted the greatest outperformance. In periods of less severe losses, and in low-to-moderate growth periods, active managers also generally outperformed.

This study also shows that in less efficient asset classes, like small caps, long-tenured active portfolio managers outperform their benchmarks 64% of the time. And it’s more dramatic with international markets – the median long-tenured active international manager outperformed its index 77% of the time.

Each Plays a Role

As an experienced financial advisor, I try not to get too caught up in the debate, although I admit the champions of passive investing have a very strong case. For me, my experience has led me to conclude that both active and passive portfolio management can play a role in your portfolio. There will be times when one out-performs the other and if you try to time the market you’re just setting yourself for failure.
So just like I counsel my clients to not be 100% invested in equities or 100% in bonds or 100% in anything, the same is true for active vs. passive. They should not be mutually exclusive.

Give me a call and we can discuss further.

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