In: Finance
Researchers find that actively managed equity mutual funds in U.S. do not outperform their benchmarks on average. Based on this evidence, would you adopt active or passive portfolio management strategy? Why?
When actively managed large-cap equity mutual funds were roundly
beaten by the benchmark indices last year, it triggered a furious
debate whether investors are better off with low-cost passive index
funds and ETFs. Active funds try to beat their benchmarks through
careful stock selection but charge a higher fee for this effort.
Passive funds, on the other, simply mirror the index by investing
in the same stocks in the same proportion. With no active
management, these funds have much lower charges.
Champions of active funds say the higher charges are more than made
up by the excess return, or ‘alpha’, they are able to deliver. On
the other hand, proponents of passive investing say there is no
point paying a high fee if active funds are lagging behind their
benchmarks.
A good number of actively managed funds struggled to beat benchmarks. But picture changes if we consider outperformance by asset size.
But they don't. If we look at superficial performance results, passive investing works best for most investors. Study after study (over decades) shows disappointing results for the active managers. Only a small percentage of actively-managed mutual funds ever do better than passive index funds.