Terry J. Diehl, The Daily Record Newswire
There has been a debate for the past 40-plus years whether to be an active or passive investor. This debate has grown with the wider ownership of Vanguard funds, and more recently with Exchange Traded Funds.
The proponents of passive investment argue that the odds of finding a money manager who trumps the market return over time are too low to justify the search, and the fees would also not justify the additional outperformance. For you inquisitive minds, the industry average is about 18 to 20 percent of managers do outperform over time (depending on whose research you use).
My personal philosophy has been to have the very best professional advice possible — lawyers, doctors, accountants, etc. — on my team. The fees were miniscule in relation to the net outcome. Owning the whole market or investing with an underperforming manager through the 200-2009 Great Recession, many investors saw their assets decrease by almost 50 percent or more.
I was very happy to be with an active manager, Karpus Investment Management, who took numerous steps to protect my and my clients’ assets — lowering international equity exposure, eliminating exposure to mortgage-backed securities that were not government-backed, switched to U.S. government money market funds, lowered equity exposure, increased use of alternatives and cash equivalents, maintained extensive diversification among assets, asset classes, managers and investment styles. These are just some of the measures.
We now have the ability to look back and see that the markets have come roaring back from that March 9, 2009 low. The S&P 500 is up more than 150 percent since that time. The net effect of all the protective measures was that our average balanced portfolios were down significantly less than our peers, and we repositioned the accounts for the rebound so that almost all of our portfolios were back to their market highs 18 months ahead of the market averages.
In reading numerous reports on active vs. passive investing I found it interesting that Vanguard Group is the best known index fund manager with $2.3 trillion in assets. Yet, Vanguard is a big player in the active fund business with 40 percent of the above total assets in their Primecap stock funds.
Since September 2008, assets of passively managed U.S. and foreign stock mutual funds have doubled to $1.31 trillion, according to Morningstar. By contrast, assets in actively managed mutual funds are up 28 percent over that same period to $4.58 trillion. ETFs have also grown rapidly since 2008, now holding $1.5 trillion in assets.
Rather than debate the issue, I think there are some very rational takeaways to help the average individual with his portfolio:
• Asset allocation is key. Worry less about active vs. passive and concentrate more on the correct mix of stocks, bonds, international and alternative holdings. Allocation and diversification are what will save you or help you in any severe market swings, either up or down.
• If you are going to index, know the fees. Fund companies take their fees off the top — directly from fund assets, reducing your net return. Don’t assume just because a fund is passive that is is cheap. Check the fees. You can easily check at Morningstar — www.morningstar.com — by plugging in the ticker symbol.
• Consider active funds in asset categories where managers historically have had a better chance of outperforming the index. In the 5 years ended June 2013, 43 percent of emerging-market stock funds beat their index. Among US large stock funds, by contrast, just 23 percent beat their index.
• Remember: All investing is active on some level. Making a decision to buy passive funds is an action. If you own nothing but index funds, and trade in and out of them regularly, you are actively playing the market.
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Terry Diehl is a vice president for Karpus Investment Management, an independent, registered investment advisor that manages assets for individuals, corporations and trustees. Offices are located at 183 Sully’s Trail, Pittsford, N.Y. 14534; phone (585) 586-4680.
