The active-passive investment management discussion can be a heated one at times. You'll find diehards in both camps, but personally, I don't see it as an all-or-none proposition.
Full disclosure: I work for an index mutual fund manufacturer (Pro-Financial Asset Management) and about half of my own portfolio is made up of index funds.
It's fairly well accepted that everyone has their own equity-to-fixed-income split that is appropriate for them based on their time horizon and tolerance for risk.
I think we're moving more toward that line of thinking when it comes to active versus passive investment vehicles. I think it will become less common to see 100-per-cent passive portfolios and 100-per-cent active portfolios, and more common to see a mix of the two strategies.
I'm not alone. Some active-investing poster boys have had some pretty interesting comments about passive investing over the years:
Warren Buffett
"A low-cost index fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth."
Benjamin Graham
Benjamin Graham, Mr. Buffett's mentor, is required reading for anyone who is serious about active investing. He died in 1976 and, during that year, he said the following:
"I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook Graham and Dodd was first published; but the situation has changed a great deal since then. In the old days, any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost."
Peter Lynch
Mr. Lynch was famous for helming the Fidelity Magellan Fund (a U.S. mutual fund) from 1977 to 1990. During this time, he beat the S&P 500 11 times out of 14 calendar years. His average annual return was 29 per cent.
"Most individual investors would be better off in an index mutual fund."
By no means does this mean active management is dead. In fact, indexing only really works if there are ample active managers out there to set prices because index fund investors are not price-setters, they are price-takers. However, there is so much money invested with active managers today compared to index funds that indexing strategies look pretty compelling.
If there was a massive shift to index funds (magnitudes greater than what is happening now), you would see me writing about the glaring opportunities being missed by not looking for active management, but we're light years away from that. You don't have to take my word for it though; just look at the opinions of three of the most well-known active managers of all time.
Preet Banerjee is a senior vice-president with Pro-Financial Asset Management. His website is wheredoesallmymoneygo.com.
Preet Banerjee