What’s Going On Here?A new study this week revealed only half of Europe’s professional stock pickers beat their benchmarks in 2020 – lending further weight to the idea that such “active” investment strategies simply aren’t worth it. What Does This Mean?Much ink (and probably even a bit of blood) has been spilled over which approach delivers better returns: picking individual investments or “passively” backing entire markets. Most research lands with the latter – but active advocates claim that when volatility spikes, professional stock (and bond) pickers prove their worth by better navigating big swings up and down.
Those hopes may now have been dashed, however. Amid last year’s pandemic panic and the subsequent "everything rally", just 50% of European active investment funds outperformed a passive equivalent. That’s admittedly higher than the ten-year average success rate of under 25% – but it’s hardly a resounding victory. Things weren’t any better across the Atlantic, either: only 49% of active American funds outperformed their passive peers last year, according to a report out earlier last month. Why Should I Care?For markets: Hot pockets persist.
Active investment strategies tend to work better in some areas than others. In the US, long-term success rates are highest for active funds investing in bonds, real estate, and international stocks – and lowest among funds that invest in the biggest US stocks. That stands to reason: America’s largest companies are so closely watched by so many investors that it’s much more difficult to find potentially undervalued gems.
The bigger picture: Get the best of both worlds.
Active and passive philosophies aren’t mutually exclusive: after all, investors still have to make decisions about which passive funds to pick and in what proportion. You can also further combine the two strategies through a "core-satellite" approach, benefiting from both the solid diversification of passive investments and the enhanced potential of smaller freewheeling trading ideas. | 