Active vs. Passive? It Doesn't Matter.
How the Debate Misses the Point
The debate between stock-picking active and index-based passive management has been raging for years. So far, the momentum is all on the side of passive managers. BlackRock, Vanguard, and State Street occupy the top spots on the AUM tables, each passively managing trillions of dollars.
Meanwhile, traditional stock-picking active managers have been hemorrhaging assets. According to Morningstar research, U.S. passive mutual funds added $492bn in 2016, whereas active managers have shed $204bn. These numbers are for open-ended mutual funds and don’t include ETFs or the shift in institutional assets, where the same trends are underway.
Each side makes valid points:
Active Management argues…
- Passive investing doesn’t allow for the efficient allocation of capital.
- There is no attention paid to valuations, fundamentals, etc..
- Passive has no chance of outperforming the benchmark.
Passive management argues …
- Active management has very high fees.
- Few active managers outperform their benchmarks after fees.
- Identifying active managers likely to outperform is difficult.
In the end, however, it doesn’t matter.
Active or passive: It doesn’t matter.
The argument is largely futile because it misses the point for two reasons:
- It is focused on relative performance rather than absolute performance.
- Neither side directly addresses the biggest threat investors face—systematic risk.
The choice between active or passive becomes irrelevant when both types of managers fail to directly address the risk that can result in adverse investor behavior: selling low in the midst of a market downturn.
Read the full discussion in our post, " Active vs. Passive? It Doesn't Matter. "
