Active vs passive investing: Use active to your advantage

 

 
Much has been written about the demise of active management at the hands of passive investing. Certainly, some market environments can favour passive over active but the opposite is also true, and the current backdrop may well be one in which active management can thrive – by JP Morgan Asset Management
 

Is passive investing better than active?

 
Over the last decade, the number of actively managed funds outperforming their index benchmarks has dipped. If we look from 1990 through 2009, over 40% of active funds outperformed, a high hit rate, but since 2010 that rate has declined to 34%.
 

US Large Cap, actively managed excess return vs. prospectus benchmark

 

 
Source: J.P. Morgan Asset Management, Morningstar. Data most recent through 31 December 2021. Analysis includes Actively Managed US domiciled US Large cap funds (Value, Growth, Core) net of fee returns versus their respective prospectus benchmarks. Historical data includes funds that are no longer active. © 2022 Morningstar. All Rights Reserved. Past performance is not a reliable indicator of current and future results.
 
Many investors may give up the search given those odds, yet by doing so they may be foregoing a lot of capital appreciation. When we overlay the previous chart with the best performing fund managers and their alpha generation, on average these fund managers have outperformed their index by 2.6% per annum net of fees.
 

‘Due to the effects of compounding over time, this additional 2.6% a year can make a significant difference to portfolio returns’

 
Due to the effects of compounding over time, this additional 2.6% a year can make a significant difference to portfolio returns. For example, $1,000 invested in the S&P 500 at the start of 1990 would be worth $26,318 today, but $1,000 invested in the S&P 500 over the same period with the extra 2.6% a year would be worth nearly double at $55,903.
 

US Large Cap, actively managed excess return vs. prospectus benchmark

• _{Source: J.P. Morgan Asset Management, Morningstar. Data most recent through 31 December 2021. Analysis includes Actively Managed US domiciled US Large cap funds (Value, Growth, Core) net of fee returns versus their respective prospectus benchmarks. Historical data includes funds that are no longer active. Leading Funds comprise all funds that rank in the 25th percentile based on excess returns in any calendar year. © 2021 Morningstar. All Rights Reserved. Past performance is not a reliable indicator of current and future results.}

Should you take a more active investment approach?

 
Is now the time to consider looking for an active manager in the US with a proven track record? So far this year, the trend has been much better, with 62% of active managers in the large cap blend category outperforming the S&P 500 (source: FactSet; Lipper Analytical Services; FTSE Russell; Jefferies, as of 30 June 2022).

From our perspective, it’s not a question of active versus passive, but the balancing act of active and passive. We believe the ability to take an active approach to managing individual asset classes can reap many benefits over the long-term. Investors can add significant value by:
 

• Selecting active managers with a track record of long-term success
• Investing in active strategies that have been able to add value across market cycles
• Taking a long-term view and compounding the benefit of active outperformance over time

 

 
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Take the long view

 

 
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