Von Aldo

The Active versus Passive Management Debate Continues

I suppose the argument among indexers and active management proponents will continue on forever. I have to say, though, I find Research Affiliates' case compelling. Of course, Research Affiliates is a pioneering fundamental indexing manager founded by Rob Arnott, so, you'd expect them to draw the conclusion that they come to: passive indexes after trading costs and fees beat active managers.

There is often a survivor bias when you read about the recent success over the last 10 years (the lost decade when the S&P lost 1 percent a year annually.) Here is a fun quote from the research: "All told, of the 393 managers running large-cap money at the beginning of 2006, 116 (or 30%) are now gone!! One-third of the active managers that investors relied on four years ago have gone the way of the dodo bird."

In this month's Fundamentals, Research Affiliates examines eVestment Alliance data indicating that 90% of large-cap core institutional managers outperformed the S&P 500 in the 2000s. RA cautions that after controlling for survivorship and "backfill" bias and netting out management costs, active managers show no significant advantage for the decade. In January, Rob Arnott wrote a similar piece about how fundamental indexing performed, how in the first decade of The Aughts, rather than losing money, you would have earned a small return.

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