Investors have two main strategies which they can use to generate a return on their investment accounts: active portfolio management and passive portfolio management.

  • Active portfolio management focuses on outperforming the market in comparison to a specific benchmark such as the Standard & Poor’s 500 Index.
  • Passive portfolio management mimics the investment holdings of a particular index in order to achieve similar results.

As the name implies, active portfolio management usually involves more frequent trades than passive management. Active managers are also not constrained by the index which they are invested in and have the ability to own as many, or as few of the stocks which make up the index as they wish.

There has been an ongoing argument since the introduction of passive strategies as to whether the more costly active strategies can outperform them. In volatile markets such as the one we currently find ourselves in, with the liquidity and dislocation being experienced, we would expect our active managers to outperform their passive peers.

In December 2019, Morningstar published their latest “Active/Passive Barometer” paper written by Ben Johnson, CFA – “A semi-annual report that measures the performance of US active funds against passive peers in their respective Morningstar categories”.

The research carried out identified that “48% of active US funds outperformed their average passive peer over the 12 months through December 2019, up from 38% in 2018” and that “All told, around 47% of active funds beat the passive composite for their category in the 12 months through December 2019”.

At BAM we use a combination of both strategies within our funds and closely monitor these to make sure we are getting the best value for our investors. We regularly communicate with our active managers to understand their market positioning and what they have implemented to take advantage of opportunities that will present themselves at all times, but especially now in these unchartered waters.

BAM have strong working relationships with many active fund houses, but we are not emotionally attached to them and whilst we can expect to see some periods of underperformance versus passive strategies, we need to be convinced that in the long term their investment process will lead to higher returns.