Let’s face it, passive investing is all the rage. It makes perfect sense when, since 2011, active large-cap equity management has only outperformed in one year. Some are wondering if active management has any future. In the current black or white, this or that, all or nothing climate of discourse, data gathered by Hartford Funds gives context and perspective on this existential argument.
Using yearly total return, the embedded chart displays whether passive S&P 500 Index funds beat active funds from the Morningstar Large Blend category. Just a cursory look will provide you with enough evidence to entertain the idea that the active/passive debate is nothing new. From 1990-1999 passive investing outperformed active investing in all but three years. How is that for context? What followed the six year streak for passive investing was the Tech Bubble.
Just one year shy of the six year underperformance streak of 1994-1999, this decade’s active managers are feeling the pressure. In the current Central Bank-sponsored bull market, the phrase “A rising tide lifts all boats” seems to gain validity. There is another side to this coin; Active managers are hanging on to the famous Warren Buffett quote “Only when the tide goes out do you discover who’s been swimming naked.”
Why is this relevant? Well, active management outperformed passive management nine out of ten years spanning 2000-2009. During that time the US economy faced two recessions. This data tends to support Buffett’s assertion that when the market endures stress, prudent active management has an opportunity to outperform. More so, it supports the cyclical nature of the active vs. passive debate.
With such an impressive run for passive management, one could argue that a changing of the guard could be near. Two psychological biases seem important to remember then. Recency bias tricks the mind into thinking what has happened in the near past will continue into the future. Loss Aversion is the basic concept that a loss hurts more than an equal gain.
Therefore, with a trade war between two of the world’s great powers, a global manufacturing recession, and a yield curve inversion, would you agree that it may be time to turn off autopilot and take the controls?
Data Sources: Hartford Funds 2019 Insight – The cyclical nature of active and passive investing.