May 08, 2023

During 2022 the S&P 500 and the fixed income indices experienced double digit declines. Worse yet, the performance differential between these two asset classes was much smaller than the decline and that meant little gain from diversification. A change in the dispersion or differential rate of return across asset classes and/or stocks is an ideal investment environment for an active management strategy. But the environment is not enough. The portfolio manager must have the skills to navigate that environment to their advantage. The ability to anticipate or forecast the changing differential is an important and necessary component to successful active management. This line of reasoning leads one to wonder whether the investment environment and the skill level of individual managers are sufficient to allow for the development and implementation of an active portfolio strategy; the alternative being a passive strategy if the environment and skill conditions are not met. All of this brings us to the issue of whether the data favors passive or active investment strategies. In what follows we argue the number of managers underperforming their benchmark significantly overstates their lack of skill. When all of the issues discussed here are considered, the case in favor of the passive index weakens.

You must have an active account to view these reports. You may register for a trial here

Download Complete Report in PDF Format

Download Complete Report in Word Format