The Los Angeles Times weighs in on the raging debate over active versus passive investing. Comparing an “average” diversified large cap actively managed fund to an S&P 500 Vanguard passive fund, the results clearly favored the indexing approach, with a 10-year return of $20,002 versus $18,840, according to Morningstar. This raises the question of whether actively managed funds are worth the time and fees. The answer, as it is with many tough questions, is that it depends.
For example, while only 23% of active U.S. large cap funds beat their index over the last five years, 44% of foreign large cap funds outperformed, as did 63% of intermediate bonds and 43% of emerging market stock funds. American Funds, which has experienced net outflows since the great recession, outperformed their benchmark in their giant GFA fund, as did Dodge and Cox’s Stock Fund and PIMCO’s Total Return Fund. Vanguard, the king of passive investing, has 40% of its assets in active strategies.
Still, passive funds have doubled since September 2008, growing to $1.31 trillion; active stock mutual funds, however, have only increased 28% over the same period, to $4.58 trillion. And ETFs now include $1.5 trillion of assets.
The Times’ advice to investors:
• Focus more on allocation than funds.
• Keep a keen eye on fees, even with passive strategies.
• Some asset categories, like large cap U.S. funds, may be more appropriate for indexing.
• To a certain extent all investing is active, just as there is no such thing as a passive TDF.
For many unsophisticated investors without access to professional financial advice, indexing may be the right answer. But for others — especially those who have the foresight and patience to stick with a manager through investment cycles— a mix of investment strategies may be a wiser choice.
