The battle between passive and actively managed funds continues to rage on. Some of the top investing minds legends have consistently promoted the reliance on passive index investing to grow your wealth and the avoidance of actively managed funds. Between their fee structures and skewed data, actively managed funds are much maligned.
But actively managed funds may be breaking through this long-held stigma based on clear results. Let’s look at how T. Rowe Price is touting the virtues of actively managed funds and whether they’re right for your portfolio.
To determine what investing strategy might work for you, cover your bases by starting with a financial advisor. While investment management is for risk tolerance and asset allocation, a vetted advisor can help you with effective estate plans, retirement and general financial planning.
What is Passive vs. Active Investing?
Passive investing involves a “buy and hold” philosophy, where you select your investments based on their consistency in performance. Other than balancing your portfolio, you don’t frequently buy and sell. Many times, investors will choose index funds like the S&P 500 (which is the stock market benchmark) and ETFs which mimic it to duplicate its performance.
Active investing prompts movement, where investors are constantly buying and selling to keep up with market trends. Since keeping up with news and trends can be a full-time job, many entrust their assets with management firms to be actively managed. In exchange, these firms will take a fee for their efforts.
Which is Better?
Historically, passive investing has been the better choice for both amateur and seasoned investors. There is a small percentage of firms that have outperformed expectations, but many describe these happenings as “even a blind squirrel finds a nut once in a while” type of occurrence.
The decision ultimately comes down to your risk tolerance and your investing goals. But there are some factors to look for if you’re seeking active fund management.
- Performance, including annual returns, compared to market returns
- Fund manager’s background, experience and track record
- Expense ratios and other fees
- Fund turnover ratio
T. Rowe Price released a study that captured its performance across its active funds in comparison to both its active and passive competitors. Their data set consisted of 1-, 3-, 5-, and 10-year returns for both their funds and comparable passive return averages. The data was collected from October 1, 2002, to September 30, 2022.
Here’s what the firm found from 20 years of research:
- Active vs. Passive: The active success rate for equity was 76% overall with actively managed funds surpassing passive funds 73% of the time
- The Breakdown: The average excess equity returns (returns above the market benchmark) were 0.78% for the U.S. and 0.64% for international
- Performance Consistency: Outperformance in excess equity returns, after the fees and expenses were removed, occurred at the 1, 3, 5, and 10-year periods
- Low Expenses: Over 90% of T. Rowe Price actively managed funds held expenses below their actively managed competition
For additional information read the methodology summary.
T. Rowe Price’s study provides substantial data backing the thesis that actively managed portfolios are capable of besting passively managed portfolios. This study demonstrates that skillful research, disciplined risk management and an anticipatory approach to market disruption can yield results. Does this mean that you should throw out your passive investing approach? No. But this study does extol the virtues of actively managed investing, something that may be worth exploring with a vetted financial advisor.
Tips for Investing
- Whether you’re considering getting started with investing or you’re already a seasoned investor, an investment calculator can help you figure out how to meet your goals. It can show you how your initial investment, frequency of contributions and risk tolerance can all affect how your money grows.
- Consider talking to a financial advisor about active vs. passive investing to help decide which one is a better fit. Finding a financial advisor doesn’t have to be hard.
- SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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