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Oct 07

Boxing Match – Active vs. Passive Management

by

The active vs. passive investment management debate is one of the most highly discussed topics in the advisory industry.   The 24-hour news coverage and the constant barrage of commercials make it appear that beating the market is a very easy task.

First, let’s start with a brief definition of the two investment philosophies.

Active Investment Management – Objective is to outperform the market through superior timing and security selection.

Passive (Index-Based) Investment Management – Objective is to track market indices in order to get market returns while minimizing cost.

Recently, S&P Dow Jones Indices released their biannual scorecard measuring the performance of active funds vs. the market indices.  The study primarily compares the percentage of active funds that underperform the market index.  It also quantifies the average return of an active fund vs. their benchmark index.  The table below depicts a summary of the study by asset class.

Percentage of Active Funds Outperformed by Benchmarks

Asset Class

One Year

Three Years

Five Years

Large Cap

60%

86%

79%

Small Cap

64%

80%

78%

International

61%

71%

63%

Emerging Markets

55%

56%

75%

Real Estate

57%

95%

81%

Long-Term Bonds

5%

88%

90%

Intermediate-Term Bonds

43%

38%

40%

Short-Term Bonds

75%

72%

87%

– S&P Indices Versus Active Funds (SPIVA) Scorecard, Mid-Year 2013

In aggregate, most active managers underperformed their benchmarks over the past 12-month, 3-year and 5-year time periods.

What does all this data show?

We at Rockbridge strongly believe in passive (index-based) investment management and this study reinforces our approach.

The full results of the study can be obtained here:  http://app.info.standardandpoors.com/e/er?s=795&lid=86202&elq=52998fc8ced84f01a3a92c5f4432ded7

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