In one of the most volatile markets in decades, active fund managers underperformed again

As the name implies, passive funds don’t have human managers making decisions about buying and selling. Almost 81% of large-cap, active U.S. equity funds underperformed their benchmarks. Moreover, it isn’t just the returns that matter, but risk-adjusted returns. A risk-adjusted return represents the profit from an investment while considering the level of risk that was taken on to achieve that return.

  • A further issue raising the discussion of the EMH is the alleged existence of a real market portfolio reflecting the overall weighted market return.
  • The key questions at the heart of it is on the ability (or not) of active managers to beat their underlying benchmarks and whether investors should simply abandon active strategies for passive investments.
  • The material should not be considered tax or legal advice and is not to be relied on as a forecast.
  • The macro-economic climate over the last ten years has worked in favour of passive management and made life very difficult for active management.
  • The trick, then, is to decide if the additional investment earnings that come from active management are high enough to pay the addition­al fees and still net better returns for the investor.
  • Instead of letting recent performance enchant you into chasing returns, you should instead consider current market conditions and what the future could hold.
  • For this report, we analysed the performance of 2,247 active funds and 564 passive funds across 21 different investment sectors.

As identified in our recent fund manager league table, over 57% of funds consistently underperform when compared alongside their sector peers over 1, 3 & 5 years, with a further 26% of funds averaging moderate levels of performance. As an active fund manager seeks to outperform the market, he or she must thoroughly research the investments available within the fund’s targeted asset class(es). It’s a labor-intensive process, requiring a deep understanding of financial markets, industries and individual companies.

The Importance of Fund Selection When Investing In Active Funds

The over and underperformance strongly depends on the benchmark index applied, as the results from Brinson, Hood, & Beebower (1995) demonstrate. Active and passive funds each have their respective benefits but one fund type may work better than the other for some investors. It’s wise to learn about the pros and cons of active versus passive funds before you choose to buy, or choose not to buy, a particular type of fund.

active vs passive investing statistics

It could be related to the fact that we are living in the information age. Information has never been as abundant, accessible and cheap as it is today. For decades, active managers have claimed that in boring markets, don’t expect them to outperform. When things change fast, however, when there are rapid changes in the economic outlook and high volatility in the markets, active managers who can make quick decisions will crush their passive competitors. While bull markets can last quite some time, they’re not immune to occasional corrections (as measured by a loss of 10% or greater) to help keep them healthy. Like speed limits on highways, market corrections are a necessary evil in investing, but not one to be feared.

Active Vs Passive Investing: What’s The Difference?

Active/passive cyclicality is further demonstrated with high and low amounts of stock “home runs”—that is, a stock that outperforms the benchmark by 25% or more. Markets that feature large amounts of home runs signal dispersion in stock returns. High dispersion should benefit active managers who can single out the winners, whereas a low number of home runs indicates stocks are moving together, which typically benefits passive management.

Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters. Either way, buying and selling companies involves costs which can eat away at performance. To keep the fund’s performance as close to the index as possible, tracker funds use techniques like reinvesting dividends at an appropriate time to keep costs to a minimum.

Active vs. Passive Investing Example

There is ample evidence to suggest that a major economic about-face is currently underway, shifting from monetary to fiscal policy (government spending). Deflation will give way to inflation, low volatility to high volatility. This is the environment in which active managers have historically shined. The macro-economic climate over the last ten years has worked in favour of passive management and made life very difficult for active management.

To represent active management, we removed all index funds and enhanced index funds. To represent passive management, we used the Morningstar S&P 500 Tracking category. But in certain niche markets, he adds, like emerging-market and small-company stocks, where assets are less liquid and fewer people are watching, it is possible for an active manager to spot diamonds in the rough. Active and passive investing don’t have to be mutually exclusive strategies, notes Dugan, and a combination of the two could serve many investors.

Advantages of Active Investing

Even though several sources of publicly listed share prices were used and compared with each other, occasionally single-day share prices were not provided. One reason is that certain funds, although available for sale in Germany, are only listed on foreign exchanges, such as the Swiss Exchange. Since the exchanges have different opening and closing days than Germany due to different holidays, share prices from some days were missing.

active vs passive investing statistics

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