Active vs. Passive Investments

[REWahoo]

This MarketWatch article notes that 22% ($1.7 trillion) of mutual fund assets are now in passively managed index funds, double the amount from ten years ago.

Might this marked shift towards passive management have made the market more easily beaten? That's an intriguing question, since the markets' much-vaunted efficiency comes from so many investors trying to do better than simply buying and holding. That means, ironically, that in a world in which everyone is invested in an index fund, the market would be quite easy to beat.

Not so fast...

...investment managers who are trying to beat the market trade much more frequently today than they did a decade ago.

So, even though active fund managers have a smaller market share than a decade ago, on average they today are more aggressive in their active management. These two trends largely cancel out, leaving little net effect on market efficiency...

The bottom line remains unchanged:

My three decades of tracking investment advisers has shown that, over long periods of time, about one out of five advisers are able to do better than simply buying and holding an index fund. While that means it isn't impossible to outperform the market over the long term, the odds are stacked against us.

 

[Gone4Good]

Thanks for the article.

It raises the interesting question of when passive investors will reach sufficient critical mass to tip the balance in favor of active investors. I wonder if passive investors as price takers and infrequent traders reduce the overall liquidity of the market in a way that neutralizes their passivity. In other words, active managers still dominate the price setting function even though they are a smaller part of the overall market.

Whatever the reason, its good to know the efforts of all of those active investors are still paying off for me.

 

[unclemick]

I usally go with 1 out of 6 - AGAINST me - ala Wm Bernstein's '15 Stock Diversification Myth.'

Beats Powerball odds.

The Nowegian widow claims it's the hormones - that's her story and she is sticking to it.

heh heh heh - besides football season is over - Saint's finally won the Superbowl - I have some dog financials and div cut stocks that need to be changed - and well you know I been trying since 1966 - one or a few good stocks. Just you wait - this year for sure.

Full auto - Target Retirement for retirement - and a few good stocks - as hormone medicine.

 

[jIMOh]

I am in the minority here that most of my assets are in actively managed funds. This is good information, and one of these days we can compare results.

 

[Onward]

Thanks for the article. I'm interested in anything having to do with active vs passive investing.

 

[Nords]

My three decades of tracking investment advisers has shown that, over long periods of time, about one out of five advisers are able to do better than simply buying and holding an index fund. While that means it isn't impossible to outperform the market over the long term, the odds are stacked against us.

In other recent surprising statistical news, 99% of active investors have chosen at least one of the "one out of five" advisers who do better than the rest of the poor clueless masses...

 

[WilliamG]

We have a mixture of active and passive, but are particularly drawn to active for the balanced funds which are a core part of our strategy. The professional management of bond durations along with re-balancing within a window of stock/bond allocations all combine for some value added here.

 

[unclemick]

Sooo - should I pssst Wellesley here - or wait for a few more posts on this thread.



heh heh heh - The ah er top ten of actives like Wellington, Wellesley, Dodge&Cox and Warren Buffett's recent stock buys are watched by yours truly for potential Nowegian widow candidates.

 

[RonBoyd]

In other recent surprising statistical news, 99% of active investors have chosen at least one of the "one out of five" advisers who do better than the rest of the poor clueless masses...

 

[Pete]

Rating agencies like the S+P have been critisized for some of their ratings practices(bias and politics). How well did they call this latest crises in the financial institutions? Did they accurately rate them? Is there any politicing going on in who they pick for their indexes? I wonder how much of an effect it has on how "passive" our investments are, in indexes they compile?

 

[Gone4Good]

Rating agencies like the S+P have been critisized for some of their ratings practices(bias and politics). How well did they call this latest crises in the financial institutions? Did they accurately rate them? Is there any politicing going on in who they pick for their indexes? I wonder how much of an effect it has on how "passive" our investments are, in indexes they compile?

Well then the politicing results in pretty consistently good stock picks . . .

My three decades of tracking investment advisers has shown that, over long periods of time, about one out of five advisers are able to do better than simply buying and holding an index fund. While that means it isn't impossible to outperform the market over the long term, the odds are stacked against us.

 

[Pete]

Well then the politicing results in pretty consistently good stock picks . . .

When compared to "professional" stock fund managers.

 

[youbet]

It raises the interesting question of when passive investors will reach sufficient critical mass to tip the balance in favor of active investors. .

It also raises the question as to just what a "passive investor" is. Sure someone who owns three funds, TSM + total world less USA + total bond and infrequently rebalances is easy to classify as "passive." But what about the person who owns 6 - 8 index funds and rebalances frequently and might even change allocation targets with frequency? And maybe satisfies that "day at the track' urge by holding 10% or so in individual stocks? And maybe holds 10% or so in carefully chosen CD's when they're attractive?

It seems like so-called "index" funds are becoming so prolific tracking a long list of ever more focused indexes, plus the opportunities to hold some investments to satisfy one's urge to actively manage a portion of your assest, that these "active investor" and "passive investor" names are becoming less meaningful.

 

[Kabekew]

So one out of five advisers beat the market, but how many are actually trying to beat the market? A lot of times their clients' mandate is also to balance risk with some conservative investments, not necessarily go all-out and try to maximize returns. Thus their target may just be to match the market or even underperform it, with its lessened risk.

I also read it that the strong majority of investors (78% to 22%) are still in actively-managed funds. Maybe there's a good reason for that?

 

[mickeyd]

http://www.marketwatch.com/story/active-vs-passive-investments-2010-03-03

This MarketWatch article notes that 22% ($1.7 trillion) of mutual fund assets are now in passively managed index funds, double the amount from ten years ago.

Being a long-term indexer (passive investor) I have always felt pretty secure in the knowledge that only 10% of us investors were hip to this indexing deal and how it beat the pants off of long-term actively managed MF investing or individual equity investing. I'm shocked that the number has moved up from 10% to 22%!

It leads me to believe that we have been too damn vocal and done too good a job at saying so.

I'll start the reversal movement here. Please feel free to copy the following slogan and post it to as many online forums as possible in an attempt to drive down the number closer to 10% once again...

INVEST IN ACTIVELY MANAGED MUTUAL FUNDS. INDEXING IS ONLY FOR AVERAGE RETURNS!