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Thursday, December 08, 2011

When Does Passive Beat Active?

News summary by MFWire's editors

Active fundsters may find some comfort in Morningstar's latest thoughts on the active versus passive debate. John Rekenthaler, vice president of research, penned an analysis of the debate for the December/January issue of Morningstar Advisor magazine.

What does Rekenthaler conclude? He argues that trying to predict where active management will beat out passive "looks to be a mug's game."

"Few active mutual funds have as pure an exposure to a given asset class as does an index, so by definition a fund will struggle to keep pace with the index if the asset class finishes first over the time period," Rekenthaler wrote. "Conversely, it takes a specially incompetent or unfortunate fund not to beat the index of the last-place asset class."

Rekenthaler stresses that index selection and composition matter. He notes that the Vanguard Intermediate-Term Bond Index Fund [profile] is beating its active counterparts largely because active managers are less willing than the index to bet as heavily on longer durations and Treasuries. Between December 31, 2000 and December 31, 2010, active intermediate bond fund managers beat the Barclays Capital Aggregate Index but fell behind the Barclays Capital U.S. Government/Credit 5-10 Year Index, and large blend funds paced the S&P 500 while lagging the Russell 1000 and the Wilshire 5000

Edited by: Neil Anderson, Managing Editor

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