Welcome to the new my.morningstar.com! Learn more about the changes and how our new features help your investing success.

Active and Passive: Value through Investment Selection

An active and passive approach gives us flexibility to add value through not only the possibility of outperformance or lower costs but through precise implementation of our investment ideas

Often investors and their advisors set up active and passive investing as a dichotomy—either seek outperformance from actively managed funds or cut costs with passive solutions. However, depending on the objectives of a portfolio, we find value in making the most of both approaches by choosing the right fit to best express each investment idea. We’ll explore our philosophy to active/passive investing, ultimately illustrating how an active and passive approach gives us flexibility to add value through not only the possibility of outperformance or lower costs but through precise implementation of our investment ideas.

Early thinking on the active/passive decision was based primarily on the idea that active management has a greater chance to be effective in less-efficient markets, which was supported by the findings of a 2014 paper by Morningstar Investment Management. The paper was primarily a US-based study, but intuitively confirmed that the average small-cap manager was more likely to top its benchmark than its large-cap counterpart, and that the size of the outperformance was also on average higher than that of large-cap managers. Similarly, emerging markets equity managers were found to be more likely to outperform their respective benchmark than other developed markets equity managers.

Interestingly, the study also showed that the dispersion among returns for U.S. large-cap blend managers was much less than that for other equity asset classes. In fact, many of the asset classes in which the average manager topped the benchmark over the period also showed greater dispersion among managers. This suggested that skilled manager selectors might be able to more easily differentiate between future outperformers and underperformers in certain asset classes, making them potentially better suited to active management than others.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Member.

Register For Free

About Author

Morningstar Analysts   -

Audience Confirmation


By clicking "accept" I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See "Cookie Consent" for more detail.

  • Other Morningstar Websites
© Copyright 2021 Morningstar, Inc. All Rights Reserved.      Terms of Useund      Privacy Policy.
© Copyright 2021 Morningstar Asia Ltd. All rights reserved.

Terms of Use        Privacy Policy        Cookies