When active investing is measured against passive investing, the winner is neither or both. Or, it depends how you look at it.
In an attempt to declare a winner, research analysis firm Dalbar looked beyond theory and instead measured the impact investments have on investors’ wallets.
The research found that, over a shorter term of one to three years, passive investments came out ahead, driven in part by the unexpected post-election gains for stock markets.
Over a longer term of five years or more, active investments have produced better results, in part because investors tend to remain invested for longer periods when they know a capital preservation strategy is in place.
For the 10 months when passive investments had the greatest advantage over active, returns were positive in eight of the months. When actives had the greatest advantage, all 10 months had negative returns.
In effect, passive investments provided greater capital appreciation while active offered greater capital preservation, resulting in no clear winner for either strategy.
Dalbar’s conclusion: choose active or passive investing based on the needs and preferences of the investor and the cost of providing asset allocation and capital preservation strategies that aren’t available in passive funds.
The table below summarizes investor returns based on the research.
|Period ending December 31, 2016||Annualized investor returns for actively managed funds||Annualized investor returns for passive funds||Active advantage|
About the research: The study used data from the Investment Company Institute, Standard & Poor’s and proprietary sources to compare mutual fund investor returns of active and passive investments. Covering the period from January 1, 2002, to December 31, 2016, it utilized mutual fund flows as the measure of investor behavior. These behaviors reflected the “average investor.” Based on this behavior, the analysis calculated the “average investor return” for various periods. Both equity and fixed income funds were part of the study.