Active versus passive investment management was once a healthy theoretical debate in the world of financial academia. However, in recent years– as the research pours in, we see that the fees, transaction costs and poor tax management by active managers simply present too many hurdles for active managers to clear and outperform. Year after year, active managers produce returns that, on average, underperform their benchmarks. As we lengthen our timeframe and look back over 10 or 15 years, active managers underperform more than 80% of the time. One might observe that this academic debate is no longer healthy and intriguing, it has been settled.
Now, as we would expect, proponents of active management won’t simply concede that this debate is settled, nor will they stop trying to frame the debate in different ways which might allow their strategy to appear more attractive. One way in which they frequently argue their case is by presenting active management as the ‘safer’ alternative. The logic here is that active managers will choose ‘quality companies’ which will fare well during periods of market volatility. There are numerous ways in which active managers claim this ability, yet new research from Standard & Poor’s shows us that actively managed portfolios actually tend to be more volatile, not less. This is a powerful conclusion, as many investment professionals sell actively managed strategies as a way to protect a client’s wealth from a perceived risk in the market. As this research shows, this is in fact not true and will likely lead to a more volatile experience than what a passive investment would provide. Even in what are called ‘Low Volatility’ strategies, the source of the reduced volatility is simply the excessive amounts of cash that these managers hold, rather than investing those dollars into the market as clients would expect.
Our team at CCM believes that the best way to manage risk is through diversification, proper financial and estate planning, and comprehensive risk management. We also believe that risk is best managed by having pertinent conversations with you well in advance, so that something like market volatility doesn’t cause you to lose focus on your long-term plans and goals.
