Call Us: (800)848-2029 Course Info Enroll

Articles for Financial Advisors

Active vs. Passive

Active vs. Passive

At the beginning of 2001, there were over 540 index funds; of those, over 130 (25% of the index funds) outperformed their peer group 10 years later. Another 245 (45% of the index funds) underperformed and the balance (30%) were either liquidated or merged during the 10-year period.

During this same 10-year period (2001-2010), there were 15,790 actively managed funds (note: this number includes all share classes). Of those, 24% outperformed the peer group, meaning the “success rate” was virtually identical with index funds. Another 27% of the actively managed group underperformed and the remaining 49% were either liquidated or merged. 
 
A valid argument made by proponents of active management is that informed advisors and brokers are not likely to pick the worst performers but instead, are likely to focus on the top-performers or largest funds within any given category. Let us see what happens when the 10 most popular funds are used.
10 largest funds
 
If someone had invested in the 10 largest mutual funds (as of 1-1-2001), eight of the 10 placed in the top half of their categories 10 years later. During this same period, the 10 largest index funds averaged 3.2% a year; the 10 largest actively managed funds averaged 1.9% annually. As a side note, of the 10 largest active and 10 largest index funds, nine were equity and one was a bond fund (shown in boldface type in the table).
 
All 10 index funds finished in the second or third quartiles for the 10-year period. Four actively managed funds were in the top quartile, one was in the bottom quartile, and three lost money (but none of the index funds lost money).
 
By concentrating on expenses instead of active vs. passive management, the advisor is more likely to make a sound choice. Some advisors believe all index funds have a low expense ratio, but this is not true. In fact, the average index fund charges ~ 37 basis points less than the average actively managed fund. Although the lowest expense ratios are usually index funds, this is not always the case.
 

Mutual Funds Active vs. Passive  [2001-2010]

10 Largest Index Funds

10 Largest Active Funds

Name

Annualized

Name

Annualized

Vanguard 500

1.3%

Fidelity Magellan

0.2%

Vanguard Total Stock

2.4%

ICA

3.2%

Fidelity Spartan 500

1.3%

Washington Mutual

3.2%

Vanguard Total Bond

5.6%

Janus D

-1.1%

Vanguard Growth

1.3%

Growth Fund of America

2.8%

Vanguard European

3.4%

PIMCO Total Return

7.3%

Vanguard Extended Mkt.

6.0%

Fidelity G & I

-2.6%

Schwab 1000

1.7%

Fidelity Contrafund

5.5%

Vanguard Small Cap

7.2%

Amer. Century Ultra

0.1%

Schwab S&P 500

1.3%

Putnam Voyager A

0.8%

In a separate study covering the five-year period ending June 30, 2010, mutual funds in the cheapest quintile (of expense ratios) of each category had a strong advantage over costlier funds. Using different time periods produced similar conclusions.

 

Previous Post
Share Class Fees

Next Post
Risk-Parity Funds

For Advisors by Advisors. Browse all Programs.

Call Us Now

Telephone : (800) 848-2029

Our Address

PO Box 371243
San Diego, CA, 92137 USA

Send Us A Message

Main Email : info@icfs.com
Student Services: studentservices@icfs.com

Get Updates

Don't miss out! Subscribe to our newsletter by filling out the form below