[The negative, relative performance perceptions of active funds versus passive funds are beginning to calcify and become ingrained into our collective unconscious; approaching urban legend or myth status. However, those conclusions would be misleading.

From my view, the ongoing industry debate has always been a matter of the perspective and chosen data set and time frame one wishes to focus on. My point is that it’s healthy to regularly challenge your assumptions and perspectives and not rely solely on current trends in conventional investment wisdom.

While some of the original research and facts used to tip the scales towards passive investing are valid, there are studies coming out isolating more expansive data sets, offering different perspectives, and creating new approaches to researching this debate. Newer research and subsequent insights are revealing many interesting and contradictory results that challenge conventional wisdom and current industry practices that advisors should be aware of.

One such study is from Institute member Sean Brown, president and CEO of YCharts, an investment research platform for wealth advisors and institutional investors. We sat down to discuss his recent research report, Can Active Management Still Add Alpha?]

Bill Hortz: What was your motivation for doing this research? Why should wealth advisors be reassessing active management?

Sean Brown: With equities’ historic bull run since the 2008 financial crisis, investor sentiment has favored passive strategies, like index-tracking ETFs, and actively managed mutual funds have seen major outflows. We wanted to test active funds across years, asset classes, and various performance and risk metrics to answer these questions: can active management still provide alpha? And if so, are there any patterns as to when it is more likely to do so?

Wealth advisors should reassess, or at least be knowledgeable about, the benefits that active management can provide their clients. While passive management performs well during market tranquility, active management may offer superior risk controls. Many long-tenured fund managers have also outperformed their benchmarks over the last 20 years. Proactively identifying these managers may be a challenge, but data shows it could be worthwhile.

Hortz: You determined that you were going to go about doing this research differently. How did you fashion your research methodology to have a different approach?

Brown: Instead of using category averages or combined results of every active fund, we looked at some of the largest, most established funds across several major asset classes. Taking each asset class's top 25 funds by AUM with a track record at least back to the year 2000 and manager tenure longer than the last bear market, we averaged the returns each year to establish an "average active" return series. This approach provided what we determined to be an interesting way to evaluate "active" managers, in that it includes the most invested-in funds and gives equal weight to the best and worst funds in the sample each year.

Hortz: What were the key results from your research on active versus passive funds? Why should wealth advisors be paying attention?

First « 1 2 3 » Next