Active vs. Passive: Game Over

posted in: Blog, Other, Writing | 0

Screen Shot 2015-11-16 at 12.49.55 PMI just finished a white paper for a large financial institution on the well worn topic about which is better: active or passive investment strategies.

Sometimes, it’s productive revisit old topics because they bring a fresh perspective that either reinforces ones’ conviction or makes a slight chink in the wall that slowly exerts its influence until the next time the subject is revisited.

No such change of conviction occurred about the superiority of passive investment strategies after a deep dive on behalf of my client.  While I managed to write about 2,000 words on the topic, to me, it boils down to this:

  • Over the 10-year investment horizon, 82.14% of large-cap managers, 87.61% of mid-cap managers, and 88.42% of small-cap managers failed to outperform on a relative basis (Standard & Poor’s SPIVA).
  • Average fees for actively managed equity funds were about 84 basis points, while the average fee on passive equity funds was 11 basis points (Investment Company Institute Fact Book).

With the S&P 500 returning 5.23% over the past 10 years active managers ate ~16% of investor’s return while failing about 85% of the time.  Passive strategies ate ~2% of investor’s return and never failed, though some investors were not happy with the market’s return, hence their fund.

Can you imagine the hue and cry if 85% of your calls were dropped, or 85% of the time your car didn’t start?

It will probably be some time before I’m hired to revisit this topic.  If and when I do, I would think the biggest surprise will be why there are still actively managed mutual funds to make a comparison to.