Passive vs active management: 3 myths from the CFA

9 December 2021

What are the myths that prevent investors from making a rational choice between active funds and ETFs? Should investors nv stors focus only on average returns to make their choice? Is there a place for both active funds and ETFs in investors' portfolios?

CFA Institute contributors published an interesting article on December 1st 2021, answering those questions and giving a fair view of the active vs passive management selection.
Authors argue that the selection is currently based on myths and on studies considering only average data. Yet investors should not base the active vs passive management selection decision on average returns alone. Rather, they should look to analytical resources to screen candidates for both active and passive strategies. And conclude that they see a place in defined contribution plans for both active and passive options working together to improve participant outcomes.

They highlighted the following 3 myths:

  • Myth I: Active funds cannot sustain positive results
  • Myth II: DC Plans should select strategies with the lowest cost
  • Myth III: A. Passive management is “safer” from a fiduciary perspective; B. Active management requires far more due diligence and effort to select and monitor

At BSD Investing, we demonstrate that the 3 myths highlighted in the article come from the use of inaccurate data by market participants, based on simplifications and errrors.

The top 3 of those simplifications and errors on data are the following (1):

  1. All active funds that have been liquidated are funds that have underperformed ETFs. False: You don’t just close a fund because it’s not performing
  2. The percentage of active managers outperforming ETFs between two fixed dates reflects all the outperforming opportunities available to investors over a period. False: All the active funds existing during the period must be taken into account and not only those still present between the 2 fixed dates.
  3. Over the past 10 years, 15% of active European equity funds have outperformed ETFs. False: It is not 15% but 44% of active European equity funds that outperform ETFs over their respective lifetime.

In order to help investors select between active and passive funds, BSD Investing tool provides analytical resources for a fair choice between activ and passive management. We have developed a unique methodology based on a proprietary database, to correct market biases and enhance portfolio performance.

👀 See our video for more on the topic  

(1) See all the details on this link.
Marlene Hassine Konqui