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Passive vs. Active: 1,3 and 5 Year Comparison

Morningstar has released their BoxScore Report covering actively managed mutual funds to Morningstar indexes.This comparison report takes into account the risk that managers take in their management of the funds. This risk is measured using Alpha. A positive Alpha means that the added risk paid off and a negative alpha shows the additional risk was not worth the rate of return investors earned in the fund. This report uses a more advanced Alpha measurement, which allows for the measurement of various levels of risk as measured by sensitivity to the market, style and size.

The report shows that overall only 37% of actively managed mutual funds beat the assigned Morningstar Style Index over the past three years. Over the past five years, investors had a 50/50 chance. The report also noted that over long periods of time active mutual fund outperformance vs. the index is very rare.

For the funds that did beat the assigned index, they did it with less investing risk than their peers, meaning that the under performing funds that were fully invested did worse that the ones that held more cash. Historically, this scenario is reversed, however the last three years have altered normal risk reward expectations.

Over the last 5 years, 25% of mutual funds have gone out of business. These funds generally were under performing or had other issues, but were taken into account in this report to prevent a survivorship bias in the results.

The report certainly shows that there can be winners in the active mutual fund market; however, we at Wiser do not think that it is efficient or feasible to chase the "hot" manager and would rather invest directly into indexes. This allows us to eliminate manager risk, maintain more diversification than fund managers, keep cost low and invest for the long term. We know that the odds of success are 99% in the long term and this report shows that we could beat the active managers in the short term with the odds of 63%.

You can view the Morningstar report HERE.

Wiser Wealth Management, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

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