Pacifying the Passive Managers in Income planning and 401(k)s
There is an old proverb that says” to err is human but it takes a computer to really screw things up”. In this digital edge, at Annuity Think Tank would think that the computers would have a have a little less modesty given the fact that according to Morningstar, indexed funds and index- related savings and investment vehicles continue to trounce their actively managed counterparts over every significant time period and through bull and bear markets. According to SPIVA, there is conventional wisdom that the large cap market is efficient and should be indexed while the small cap market(Russell 2000) should be actively managed for better performance. History shows the opposite to be true as the indexers have handily beaten the active manager in this space as well for 5,10,15 and 20 year time periods in Morningstar reporting. The only category where the active manager had the edge was in Emerging Market Bond classes. Maybe that’s why the public is pulling money out of equity funds to the tune of close to $300 billion since this leg of the market upturn started in March 2009 with the Dow rising 96%.
The second perception is that in bear markets, the active managers outperform because they can hold cash whereas passive managers cannot. Well according to SPIVA again, the opposite is true across all major asset classes as the indices once again led the way. Lastly, beware as a consumer that many of the so called active funds are closet indexers who mimic and imitate the index but charge a much higher management fee than their index counterpart and that with the volatility in the market, many active managers in efforts to beat the index resort to changing styles from Value to Growth and vice versa or they venture from small cap to large cap and versa. This many times, affects performance. So the next time an advisor comes calling for an all active asset mix, ask “is there an indexed alternative?” New proverb:” He who believes that expenses are no active performers drag, get left holding the lag and the bag whether they are buying an indexed fund, annuity ,equity linked CD or ETF!”