Can we settle the debate?
It’s one of the first questions that comes up when the conversation moves to investing: “Which do you think is better over the long-term: active portfolio management or passive portfolio management?” And it’s a question that we at Benemark can answer with absolute conviction: it depends. Let’s examine the two.
Investors can select from two main investment strategies: active and passive portfolio management. Active portfolio management is exactly how it sounds: the portfolio manager focuses on outperforming an index by “actively” making buy/sell decisions, adjusting asset allocation ranges and employing other portfolio management techniques. Passive portfolio management on the other hand simply aims to replicate an index – not outperform and not underperform.
The Latest Data
Standard & Poors Indices Versus Active (SPIVA) is an organization trying to settle this active vs passive debate once and for all, and have thoroughly researched portfolio performance over the past 15 years. Here’s what they found…
During the 1-year period ending December 31, 2016:
- 66% of large-cap managers underperformed the S&P 500;
- 89% of mid-cap managers underperformed the S&P Midcap 400; and
- 86% of small-cap managers underperformed the S&P Small Cap 600.
During the 5-year period ending December 31, 2016:
- 88% of large-cap managers underperformed;
- 90% of mid-cap managers underperformed; and
- 97% of small-cap managers underperformed.
During the 15-year period ending December 31, 2016:
- 92% of large-cap managers underperformed;
- 95% of mid-cap managers underperformed; and
- 93% of small-cap managers underperformed.
So, Then It’s Settled, Right?
These statistics seem to infer that passive portfolio management outperforms active portfolio management, right? Not necessarily.
Referencing a study by AMG that plots long-tenured, actively managed large-cap fund three-year rolling returns over the 20-year period ending March 31, 2016 against the S&P 500 Index, many suggest that active portfolio managers with at least 10-years of tenure have historically done better during volatile markets.
According to the study, in periods when the market suffered declines greater than 10%, the median long-tenured active large-cap manager posted the greatest outperformance. In periods of less severe losses, and in low-to-moderate growth periods, active managers also generally outperformed.
We also see that in less efficient asset classes, like small caps, long-tenured active portfolio managers outperform their benchmarks 64% of the time. And it’s more dramatic with international markets – the median long-tenured active international manager outperformed its index 77% of the time.
Benemark’s Final Thoughts
Through our own experiences at Benemark, we have come to the conclusion that both active and passive portfolio management can play a role in your portfolio. There will be times when one outperforms the other and similar to how we counsel our clients on not being 100% invested in one particular thing, the same is true for active vs. passive. They should not be mutually exclusive.