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Tom Limoges

October 02 , 2017

Active vs. Passive Fund Management – The Ongoing Debate

Active vs. Passive Fund ManagementSeveral weeks ago, I attended Morningstar’s annual Exchange Traded Fund (ETF) Conference.  The event included many prominent leaders in the industry.  While three days of ETF and investment discussions might sound dull and boring to most, I found the content very interesting.  One topic that was discussed was the ongoing debate between active and passive fund management.

Before we discuss the debate, let’s look at the difference between the two management styles.  Passive management involves buying companies of a particular index and adjusting the holdings in your fund or portfolio to match the index as it adjusts.  The S&P 500 Index is probably the most common stock market index.  By owning an index, your portfolio earns a return as the stock prices of the underlying holdings of that index move higher.  Active fund management, as its name implies, involves more of a hands-on approach to portfolio management.  The goal of an active manager is to outperform a particular index’s return over time by overweighting or underweighting companies and sectors of that particular index.  This process involves a portfolio manager and team that analyzes various factors of a company and then determines when the price will change.    

The ongoing debate among asset managers is whether a portfolio should be constructed around active or passive strategies. Passive fund managers argue that the low cost and tax efficient nature of passive strategies are reasons to own index funds.  Active fund managers argue that the downside protection and flexibility provided by active management favors active managers. Fund performance over the last ten years pushes the needle to passive strategies, but that has not been the case across all asset classes.  Over the last year, active managers are having higher success rates vs. passive strategies. 

Rather than take a side in this debate, we understand that each management style has advantages and shortcomings.  Security National Bank employs a balanced approach in our fund selection - utilizing both passive and active strategies.  Understanding that each situation is unique, we work with the client to develop a diversified investment mix that helps accomplish their long-term goals. If you would like to discuss your strategy for the future and how your investment compares to your objective, contact the Security National Bank Wealth Management team today. Security National Bank, 137 years of solution driven service.

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