This is the year that active-investment management makes its return to form. It is the year, or so we are told, when active fights back, scores some points, and gets its revenge on passive indexers.
For the record, active management never went away. The claim that it has returned, after a run of fairly horrific performance, is likely little more than some mean reversion. This all comes in the midst of a shakeup in the investment industry, as low-cost indexing has dominated growth in the business for the past half-decade.
It hasn't helped active managers that the investing public has become much more reluctant to pay high fees for mediocre performance. Or that investors have learned to resist chasing past performance on the misplaced expectation that it will persist in the future. On top of it, there are signs that investors are starting to avoid the self-destructive mistake of selling during market declines and buying near tops.
I have nothing against active-investment management. But the issues with active management — poor performance, high costs and behavioral problems — are why for most people, a passive strategy makes a lot of sense.
Vanguard Group Inc. has dominated the debate about active versus passive investing. With good reason: As noted by Morningstar's John Rekenthaler, "Vanguard enjoyed the largest sales ever by a fund company in 2014, outdid that record in 2015, and beat it again in 2016." Other companies that manage passive funds such as BlackRock Inc., State Street Corp. and Dimensional Fund Advisors LP are attracting assets as well. But remember, Vanguard also manages more than $1 trillion in active funds.
Wading into the active-versus-passive debate requires some context. Let's consider some details:
Performance: No investor should ever complain about a bad quarter or even a bad year if the underlying process is sound. That is simply the nature of any portfolio. There are going to be times and specific market conditions when a particular style will be out of favor.
The real problem with any given performance period is whether the methodology actually can generate alpha — market-beating returns — and is repeatable. All too often, poor performance is itself a manifestation of a questionable underlying strategy, and not the end problem itself.
