Yahoo Finanzen How to Tell If Your Actively Managed Fund Is Working Best for You
Autopilot or hands on the wheel? That's essentially the difference between passive funds, which are designed to track various indexes and indicators, and actively managed funds.
Passive funds are typically low-cost, which explains much of their appeal. But the argument is more complex than cheap versus expensive, say fund managers and analysts, because actively managed funds can deliver greater net returns over longer periods.
A new measurement tool from fund analysis firm Morningstar adds more fodder for the debate. The Active/Passive Barometer is designed to "help investors measure the relative performance of active U.S. fund managers against passive U.S. funds within their respective Morningstar categories," the company says. The methodology is based on the performance of "actual investable options, instead of an index." Its goal is to replicate investor experience.
The initial results of the barometer found that actively managed funds underperformed their passive counterparts across nearly all asset classes, except for U.S. mid-cap value funds.
Passive funds tend to be a defensible recommendation, which is why 31 percent of client assets are in passive investments, according to Cogent Reports' Advisor Brandscape. Registered investment advisors and bank-affiliated advisors were more likely to put clients' assets into passive funds, Cogent found.
That's not a strategy that impresses Diana Strandberg, senior vice president and director of international equity for Dodge and Cox Funds. She says that about 30 percent of active funds are actually "closeted passive funds," based on the amount of activity in the funds, as measured by Active Share. Active Share is a measurement conducted by Vanguard that measures how hands-on a fund manager actually is.
"There's a group of funds with active managers, charging active fees, that are closeted passive," she says. "They don't achieve the active benchmark. You're hiring an active manager but they're barely active."
Strandberg believes investors would be wise to assess the volatility and return of actively managed funds over longer periods than they might for passively managed funds. Looking at the fund's return over at least two years, preferably at least three, reveals the longer-term results that active managers can reap by putting money into equities when they're down and waiting for them to bounce back.
Passively managed funds reflect values of the moment, while actively managed funds are intended to anticipate rising values and buy at the most advantageous moment. It's the difference, Strandberg says, between steering by what you see in the rearview mirror and what you see through the windshield. Strandberg based her views on Dodge & Cox's analysis of 89 actively managed funds over 20 years.
Rob Lovelace, president of Capital Research and Management Co., part of Capital Group, adds that actively managed funds tend to do better in downturns, thus boosting long-term results overall.
"Active managers tend to add the most value in down markets. Active managers tend to find those good companies that will do well; they tend to have cash in the portfolios. And so, in those challenging markets, they tend to do better," he says. But that only works if investors stick with the funds to allow enough time for recovery and for the investment to ripen.
Many analysts agree that most portfolios need a judicious blend of actively and passively managed funds. Kate Warne, an investment strategist with Edward Jones, based in St. Louis, says the pattern outlined by Lovelace translates to a defensive move for those concerned about protecting their wealth.
And passive funds easily become top-heavy with whatever stock is the flavor of the month, she adds, which actually increases risk for investors who aren't paying attention. "Passive is for when you're not worried about having more at the market peaks, and if you're OK with riding the swing," she says. "Active managers do a better job when lots of things are going down. They can dodge some of the bullets and avoid some of the risk."
Warne and other analysts point out that as exotic passive funds proliferate, charging more for their complex structures, the once-wide gap between the cost of passive and actively managed funds is closing.
Analysts agree that the pressure is on for managers of actively funds to prove their worth. So-called " index huggers" -- Strandberg's "closeted passives" -- have few places to hide, given metrics like Morningstar's new barometer.
"We're seeing a broad variety of investments, and the fees are not always as low as you'd think," she says. "Be sure that you're doing enough research to understand what you own, or to work with someone who's familiar enough with all of this, to build a truly well-diversified portfolio."
The acid test is whether active managers believe their own advice. The best criteria for selecting an actively managed fund are "fees, track record and people investing in their own funds," Lovelace says.
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