Passive versus Active Management

Morningstar recently released some cash flow data showing that passively managed equity vehicles were the recipients of significant inflows for the 12 months ending in August. Over that period, equity index funds and ETFs attracted $131 billion in net cash inflows while actively managed funds suffered outflows of $55 billion.

This trend has been growing, as can be seen by data released by the Investment Company Institute in its 2014 Investment Company Fact Book.

active vs passive chart

Adding up the active versus passive flows since 2007 indicates a relatively steady shift over time to passive investing. We would argue that this is consistent with a parallel trend among advisors to embrace an open architecture, core satellite approach that opts for carefully considering, by individual asset class, the ability to potentially add value versus the goal of achieving exposure to a specific market. Many advisors are selecting passive management where they feel the efficiency of the market precludes the ability to generate significant alpha, particularly when factoring in the cost of active management. Portfolios are increasingly a strategic mix of passive and active management. As a result, total passive assets in terms of index mutual funds and ETFs have now exceeded $3.0 trillion. Active management, however, is still alive and well, with approximately $14.0 trillion in assets. We believe that a strategy that includes both active and passive management is a highly compelling approach which more and more advisors will be following.