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3morereps
Georgia Fan
The Gym
Member since Jun 2015
6117 posts

Active vs Passive
I am a passive investor, as I was taught asset managers cannot consistently outperform market indexes over the long-term. Yesterday I met with a mutual fund wholesaler who showed me some of his active funds that have consistently outperformed market indexes net of fees. The data went back 10 years. Maybe I am just skeptical, but I am sure he only showed the winners and not the many underperforming funds. What is your view?
This post was edited on 1/16 at 7:32 am


castorinho
Oklahoma Fan
13623 posts
Member since Nov 2010
66218 posts
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re: Active vs Passive
You forgot the asterisk


*Past performance is not indicative of future results


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Mr Perfect
Lamar Fan
Member since Mar 2010
11893 posts

re: Active vs Passive
do not believe him dude. whatever you do, the fact he used this strategy to get clients is huge red flag.
This post was edited on 1/16 at 7:47 am


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Jag_Warrior
Virginia Fan
Virginia
Member since May 2015
1322 posts
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re: Active vs Passive
I’m the same as you. The ones I’ve met with in the past tended to cherry pick based on sectors that had had a nice (recent) run, or they employed selective return measurements.

Whenever I’ve brought up Sharpe ratios or max drawdowns, the conversation ended. I’m not painting them all with the same brush. But consistency of returns is important too. For a good portion of my long portfolio, I mainly use passive funds and sector ETFs (mostly) these days. As far as active investments, increasingly I’m using options and finding very good (above market) and consistent success with methodical premium selling strategies - up or down markets don’t matter to me. In fact, the increased volatility that comes from down market moves has generated even healthier profits and a higher Sharpe ratio. It’s not for everyone. I realize that. Just my 2 cent experience and opinion.


bogart
Member since Dec 2013
984 posts

re: Active vs Passive
Raging bull market for the last 10 years.


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jimbeam
USA Fan
University of LSU
Member since Oct 2011
59317 posts
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re: Active vs Passive
The last 10 years everyone has looked great Eventually we will find out who is skinny dipping.


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Shepherd88
Member since Dec 2013
2854 posts

re: Active vs Passive
My philosophy is to use both.

There are 7k+ funds out there and only 10% of them have shown to consistently outperform, so 700 funds. However, the ones that do outperform are usually the ones were the manager is not constrained to a certain style (growth, value, mid cap, etc). But he can flex between both of where he sees opportunity.

I like to use the core of my portfolio in indexes then build satellites with active management that I either see value in sector wise or an active manager has shown to outperform consistently. But I would look further than 10 years track record.


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Auburn80
Auburn Fan
Member since Nov 2017
1244 posts

re: Active vs Passive
If you are a passive investor like me, I would definitely stick to index funds. The lower fees alone make it a better option than 90% of active funds. Like a previous poster stated, you have to hunt to find the 10% that outperform indexes, and then make sure the management doesn't change.


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Fat Bastard
Boston College Fan
Member since Mar 2009
45852 posts

re: Active vs Passive
quote:

The last 10 years everyone has looked great


kinda like all of us back in late 90's with tech boom.

it was not uncommon at all for mutual funds to be yielding 40% and 50% returns. If I recall PBHG was one. I got over 100% return on Janus twenty fund. Thing went from like 40 something NAV to 90 something. was nuts.



tokenBoiler
Purdue Fan
Lafayette, Indiana
Member since Aug 2012
2738 posts
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re: Active vs Passive
quote:

What is your view?

quote:

I am sure he only showed the winners and not the many underperforming funds.


This post was edited on 1/17 at 10:13 am


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Jag_Warrior
Virginia Fan
Virginia
Member since May 2015
1322 posts
 Online 

re: Active vs Passive
Exactly! And if they just show you the *average* return, you wouldn’t know about the volatility/massive swings from top to bottom. You wouldn’t know that his “above average” gains had been achieved by riding on a roller coaster.


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CivilTiger83
Clemson Fan
Member since Dec 2017
2331 posts

re: Active vs Passive
quote:

I am a passive investor, as I was taught asset managers cannot consistently outperform market indexes over the long-term.


This isn't true. There will always be asset managers that have 10-year returns that are better than the market.

The problem is that NOBODY and I mean NOBODY knows which funds will reliably beat the index net of fees over the next 20 to 30 years.

LINK
quote:

Similarly, over the 15-year investment horizon, 92.43% of large-cap managers, 95.13% of mid-cap managers, and 97.70% of small-cap managers failed to outperform on a relative basis.


Just over a relatively short time period, we are talking about only 3-7% of fund managers beating the index. Do I take the 95% sure market return with minimal fees knowing I don't have to worry about my active manager making the wrong move at the wrong time?

A good way to frame it is this... If I told you I can guarantee that Investment Option A will return $100k in 10 years. I also have Investment Option B that may return anywhere from $50k to $120k in 10 years - which one do you take?


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