Active vs. Passive Investing in a COVID-19 World
May 6, 2020 by Bobbie Turner
In the most recent bull market, passive investments outperformed actively managed funds, leading many to question whether the added costs of active management are worth it. Inflows into passive investments led to a milestone event in September 2019 in which the assets of U.S. index-based equity mutual funds and ETFs surpassed actively managed funds for the first time. Even active investing icons Warren Buffet and Peter Lynch recently conceded that passive management would likely become the way of the future.
But a look at the last 35 years shows that active and passive investing are cyclical, trading places in terms of their outperformance over large periods of time. As one fund manager observes, “Just when it seems that active or passive has permanently pulled ahead, markets change, performance trends reverse and the futility inherent in declaring a ‘winner’ in active vs. passive is revealed anew.” The magnitude of disruption we’ve seen in the wake of COVID-19 may well have set the stage for a shift in the cycle.