Latest News

August 28th, 2013 |

In Mutual Funds, is Active vs. Passive the Right Question?

Whether we’re talking about sports or investing, people have an urge to win. In investing, investors seek outperformance. Thus, most mutual fund shareholders aren’t satisfied with the performance of a humble passive benchmark such as the S&P 500 Index. Instead, they search for an actively managed fund that they believe will beat the benchmark. Gerstein Fisher examined the perennial active vs. passive question from a few vantage points and made some interesting discoveries.

The Choice
The first conclusion should be no surprise to most investors: over extended time periods (15 years, in the case of this study), most actively managed funds have a challenging time beating passively managed index funds after fees. Using Morningstar’s fund database, we examined the performance of more than 2,000 active US equity funds during the 15-year period from July 1, 1998 to June 28, 2013. Result: only 25.6% of the active funds currently in existence outperformed their benchmarks (nearly 75% trailed the benchmark or had an insufficient track record to compare). Many other studies over extended time periods have reached a similar conclusion, including Standard & Poor’s, which found that 69% of all domestic equity funds were either outperformed after expenses by their benchmarks over the prior five years or had been liquidated during the period from Jan. 1, 2008 to Dec. 31, 2012 (Source: S&P Indices Versus Active Funds Scorecard).

At Gerstein Fisher, we tend to think that markets do a pretty good job of pricing risk; thus, investors are better off buying the market than trying to beat it. Considering how much information is embedded in the price of securities, it’s not an easy task to identify mispriced securities and outperform the market based on information that only one of us has versus the average for all of us. In the market, a dollar of outperformance by one investor is matched by a dollar of underperformance by another. Add to that higher costs for actively managed funds, such as annual expense ratios and transaction costs, and it’s clear why active funds start with a large handicap.

Please click here to read the full article.

Investment Products & Services

  • Not insured by FDIC or any Federal Government Agency
  • May Lose Value
  • Not a Deposit or Guaranteed by a Bank or any Bank Affiliate

Gerstein Fisher is a division of People’s United Advisors, Inc., a registered investment advisor and a wholly-owned subsidiary of People’s United Bank, N.A.

[contact-form-7 id="6520" title="Sign Up For Our Mailing List"]
<div role="form" class="wpcf7" id="wpcf7-f6520-o1" lang="en-US" dir="ltr"> <div class="screen-reader-response" role="alert" aria-live="polite"></div> <form action="/in-mutual-funds-is-active-vs-passive-the-right-question/#wpcf7-f6520-o1" method="post" class="wpcf7-form init" novalidate="novalidate"> <div style="display: none;"> <input type="hidden" name="_wpcf7" value="6520" /> <input type="hidden" name="_wpcf7_version" value="5.2.2" /> <input type="hidden" name="_wpcf7_locale" value="en_US" /> <input type="hidden" name="_wpcf7_unit_tag" value="wpcf7-f6520-o1" /> <input type="hidden" name="_wpcf7_container_post" value="0" /> <input type="hidden" name="_wpcf7_posted_data_hash" value="" /> <input type="hidden" name="_wpcf7_recaptcha_response" value="" /> </div> <div id="mb-form"> <p><span class="wpcf7-form-control-wrap FirstName"><input type="text" name="FirstName" value="" size="40" class="wpcf7-form-control wpcf7-text wpcf7-validates-as-required" id="FirstName" aria-required="true" aria-invalid="false" placeholder="First Name*" /></span> </p> <p><span class="wpcf7-form-control-wrap LastName"><input type="text" name="LastName" value="" size="40" class="wpcf7-form-control wpcf7-text wpcf7-validates-as-required" id="LastName" aria-required="true" aria-invalid="false" placeholder="Last Name*" /></span> </p> <p><span class="wpcf7-form-control-wrap Email"><input type="email" name="Email" value="" size="40" class="wpcf7-form-control wpcf7-text wpcf7-email wpcf7-validates-as-required wpcf7-validates-as-email" id="Email" aria-required="true" aria-invalid="false" placeholder="Email*" /></span> </p> <p><span class="wpcf7-form-control-wrap Phone"><input type="tel" name="Phone" value="" size="40" maxlength="10" minlength="10" class="wpcf7-form-control wpcf7-text wpcf7-tel wpcf7-validates-as-required wpcf7-validates-as-tel" id="Email" aria-required="true" aria-invalid="false" placeholder="Phone*" /></span> </p> <div class="hide"> <span class="wpcf7-form-control-wrap ctct-560"><span class="wpcf7-form-control wpcf7-ctct"><div><input type="hidden" value="1380445631" name="ctct-560[]" /> </div></span></span> </div> <p><span id="wpcf7-62f09e8fd573f" class="wpcf7-form-control-wrap gf-hp-wrap" style="display:none !important; visibility:hidden !important;"><label class="hp-message">Please leave this field empty.</label><input class="wpcf7-form-control wpcf7-text" type="text" name="gf-hp" value="" size="40" tabindex="-1" autocomplete="nope" /></span></p> <div class="formcaptcha"> <div style="margin: 30px 0;"> </div> </div> <p><input type="submit" value="Submit" class="wpcf7-form-control wpcf7-submit" id="submit" /></p> </div> <div class="clear"></div> <div class="wpcf7-response-output" role="alert" aria-hidden="true"></div></form></div>