September 29, 2021


2020 active vs. passive

Each year the financial services company, Morningstar, issues a report of how actively managed funds performed relative to passive funds. Historically, actively managed funds have not performed as well as funds designed to simply replicate a market or published index. However, one argument active fund managers make is that they are “nimbler” during times of extreme volatility which leads to better performance. 2020 was a year of extreme volatility, so let’s see how they did.

Compared to historical data, it was a good year for active management with active funds roughly matching passive funds across the board. Unfortunately for active management, a tie doesn’t help when you have two decades of severe underperformance to overcome. Looking back five years, active funds beat passive funds 37% of the time.  In 10 years, it’s just 30%, and with 20 years of results, it’s a meager 13%.

The story here is one we know well, costs matter. With the track record reported by Morningstar, paying a large management fee for someone to pick stocks in an effort to beat the market has not behooved investors in the past and there is little reason to think that will change.

In addition to an expected return that is below market results, active management also introduces a new element of risk. Active funds often deliver returns that are different from a benchmark. These differences are random and cannot be modeled, making it more difficult to estimate future account balances and therefore, retirement spending.

Lastly, there is no way to predict which funds will perform best in the next period. Like daily movement of the stock market, relative manager performance is random.

Until we see a consistent trend reversal, we’ll continue to recommend passive funds for our clients’ portfolios.  Knowing whether or not your investments are actively managed isn’t always obvious.  Contact Rockbridge if you’d like us to review your portfolio.

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