The active versus passive investment management discussion has intensified as of late due to active management’s recent inability to outpace their passive benchmarks. Some may have a knee-jerk inclination to fire an underperforming manager, but the data show that investors are better off staying the course.
Managers with high active share will look especially different from their benchmarks. The more a manager varies from its benchmark, the higher the likelihood of extended periods of under- and out-performance. Performance itself should never be the sole determinant for firing a manager. Instead, investors must understand why performance is suffering and determine if it is likely to persist. This article explores the reasons why active managers suffer bouts of underperformance and seeks to educate investors on the appropriateness of active and passive investments in their portfolios.