The case for active/passive investment

August 20, 2009

Fund managers come back to this recurring question — is it better to invest passively, tracking benchmarks, or manage your money actively, taking risks?

Standard & Poor’s five-year data shows the S&P 500 index — a plain vanilla bet on U.S. stocks — outperformed 62.9 percent of actively managed large cap funds.

The S&P Midcap 400 index outperformed 73.4 percent of active mid-cap funds and the S&P SmallCap 600 outperformed more than one in two actively managed small funds.

On an asset-weighted average however, the results show a more level playing field, with active managers level or ahead of benchmarks in most categories except mid-caps and emerging markets

“Passive management believers can point out that indices have outperformed a majority of active fund managers across all major domestic and international equity categories; with real estate being the lone exception. Conversely, proponents of active fund management can point to the asset weighted averages,” says Srikant Dash, global head of research & design at Standard & Poor’s.

The five-year data is unequivocal for fixed income funds. Across all categories, except emerging market debt, more than three fourths of active managers failed to beat their benchmarks. Similarly, five-year asset weighted average returns are lower for active funds in all but two categories.

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