Brown: Our key results include the following:
1. On the basis of returns, selecting the correct asset class tilt is ~10X as important as deciding whether to invest in active vs. passive funds
2. Over the last 20 calendar years, the annual returns for Active Funds studied outperformed their respective passive benchmarks ~57 percent of the time, across all asset classes
3. More than two-thirds of the time, actively managed equity funds are more consistent and less volatile than their counterpart passive funds
4. Selecting the “right” actively managed equity fund can lead to 10-30x greater returns, in relation to passive investing.
Essentially, advisors should have an approach that first captures the best asset mix for their client but also be aware of how different securities in that asset class could impact risk and returns. Dismissing all active strategies could negatively impact clients’ returns, and it’s the advisor’s responsibility to be educated on all available options.
Hortz: What else did your research uncover on ways that active funds added value beyond return metrics?
Brown: Unsurprisingly, we found that active funds added value with regard to lower drawdown and less volatility. Since passive funds cannot, by definition, stray from an index’s allocation, they’re less able to protect investors from downside risk when markets sell off. Active managers, however, are able to shift allocations when faced with headwinds, either proactively or reactively.
In our research, the pool of active funds had superior risk-adjusted returns in anywhere from 53-79 percent of years, as compared to passive funds. We also tested both strategies for standard deviation of returns and maximum 30-day drawdowns. This showed that active funds in all asset classes studied, with the exception of fixed income, delivered better downside protection than their passive counterparts.
Hortz: What was the single most surprising fact you uncovered?