Close Close
Sign In
Newsletters
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
Podcast Center Video Center Webcasts Resource Center Events
About ThinkAdvisor Contact Us Advertise With Us Asset & Logo Licensing Sitemap Terms of Service Privacy Policy Copyright © 2024 ALM Global, LLC. All Rights Reserved.
ThinkAdvisor

Portfolio > Asset Managers

The Real Factor Behind Active-Fund Outflows

By Danielle Andrus

X
Your article was successfully shared with the contacts you provided.

“There’s no universal case against active and there’s no universal case for passive,” according to Chris Tidmore, senior investment strategist for Vanguard Investment Strategy Group. 

Tidmore spoke on a panel at the Envestnet Advisor Summit on Thursday, along with Dr. C. Thomas Howard, CEO and director of research for AthenaInvest, and Gary Miller, founder of Frontier Asset Management.

A January Morningstar report found that passive equity funds brought in nearly $505 billion in 2016, while active funds lost over $340 billion.

Tidmore said that the flows out of active products into passive ones hides another factor. “It’s not an active-passive” issue, he said; “it’s a high-cost-low-cost” issue.

He said, “Most of the flows that came out of high-cost products, it just happened to be that high-cost products were active products.”

Tidmore referred to Dunn’s Law, which says that “the purest way to invest” in a market segment that is performing well is through an index product. “Anyone who’s active is playing outside that space.”

Miller, whose firm is “pretty agnostic” on the active-passive debate, said that active managers will underperform passive managers due to the difference in expenses. 

Miller uses return-based style analysis to try to benchmark management skills. ”The best managers really have a unique style,” he said. “They don’t follow benchmarks.” 

Howard pointed out that “it’s entirely possible for the average active equity mutual fund” to outperform passive. 

The industry has been “incredibly successful in producing closet indexers,” Howard said.

Cost is always the drag on a portfolio, and it doesn’t go away, Tidmore said. Investor behavior is an important part of investing success, too. Investors have to stay invested to take advantage of gains, he said. 

Some investors may not be trying to outperform the market, anyway. Tidmore noted passive investments can help clients who want returns but have lower appetites for risk. 

Howard said advisors should consider investor behavior and emotion when they’re building portfolios. “We think emotions are the most important determinant of long-term wealth.”

— Read These 10 Actively Managed Funds Beat S&P 500 for 15 Years: Morningstar on ThinkAdvisor.

NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.