Active versus passive: what lockdown adds to the debate

19 May 2020

Fund managers: John Husselbee and Paul Kim

We believe active versus passive is a needless debate for fund investors – and they should choose both. For those who insist on this discussion, however, the chart above reveals some recent trends. This shows a family of trackers versus actively managed funds, with passives largely outperforming in the recent downturn (20 February to 23 March) and underperforming in the recovery (24 March to 9 May). In both cases, the US and Asian markets were outliers.

How does this inform the debate? Unfortunately, extrapolatable data is limited by the fact short-term performance, particularly during crisis periods of indiscriminate selling, is too driven by sentiment. Looking longer-term, however, can provide useful insights: over seven years (how long these trackers have been running), active managers have outperformed, apart from in the US.

Long-term performance also shows which environments favour actively managed funds and, in my experience, they tend to do well when value or small-cap stocks are in the ascendancy. While value has been in the doldrums for over a decade, smaller companies have beaten large caps in all regions apart from the US, where returns from mega-cap tech names have created a fruitful backdrop for passives.

Even when active has beaten passive, the numbers are close enough to 50/50 to please the latter’s lobby but we suggest this is exactly why it is vital to identify those few managers with long-term skill. Consistency of performance is impossible over every timeframe, but consistency of investment process is perhaps the most important element in our fund selection.

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Please remember that past performance is not a guide to future performance and the value of an investment, and any income generated from them can fall as well as rise and is not guaranteed, therefore you may not get back the amount originally invested and potentially risk total loss of capital. Investments should always be considered as long term.

Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. 20/128

The value of investments and any income from them can go down as well as up and is not guaranteed. Your clients could get back less than they originally invested. Past performance is not a guide to future performance. The portfolios' investments are subject to normal fluctuations and other risks inherent when investing in securities. Verbatim Asset Management has taken due care and attention in preparing this document, which is solely for the use of professional advisers. Verbatim cannot be held responsible for any inaccuracies arising out of information detailed within and will not accept liability for any loss arising out of or in connection with its use. This article is for information only and should not be deemed as advice.