As CalPERS contemplates a move toward more passive investments, the question arises of what the liabilities and consequences would be. Blogger Stephen Rosenberg of The McCormack Firm in Boston asks whether plan sponsors which move to nothing but indexed investments will be sued by participants who claim that they could have done better with some active management. He also raises this question: In an all-passive world, who will be available to trade with?
A key issue that’s not raised is that in an all-index world, fees become all-important — causing a “death race” to the bottom. And then there’s the issue of risk management.
Regardless, index funds continue to beat active investments both quantitatively and qualitatively. P&I reports that index funds were up 18.4% in the year ending June 30, 2013, which added over $1 trillion to the now $7.3 trillion in passive strategies. That jump was much larger than the previous year’s 1.8% increase. Index funds outperformed active funds in all categories, with 63.25% of large cap funds doing better than active, 80.45% of mid cap and 66.5% of small cap funds.
But that still means that a lot of active funds beat their index. The trick is finding the good ones — which may be hard for smaller investors without access to an advisor or for institutional investors like CalPERS that don’t want to maintain professional staffs to guide them.
P&I also listed the top 10 index managers. The top five are easy to guess, but can you name all 10?
