Active vs. Passive – Morningstar’s Second Half 2009 Report

Morningstar has released their Box Score Report looking at active vs. passive investing strategies over the second half of 2009. The report uses Alpha to show if a fund manager has beaten its assigned index. For our less analytical readers, an alpha greater than one means the manager beat the index. An alpha less than one indicates the manager is lagging behind the index. In this report, alpha is adjusted for risk in order to make fair comparisons.

This report shows that only one third of fund managers had a positive alpha over the last three years. The report also goes on to show that expenses and taxes greatly degrade fund performance. Another interesting note is that active fund managers tend to outperform in poor performing areas of the market, but in “hot” areas they tend not to keep up with the index.

Overall, there is really nothing new, just a reminder that low cost passive investing should have a place in everyone’s portfolio. This report supports the Wiser investment philosophy of maintaining a diversified portfolio, keeping cost low and always investing for the long term.


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