“We used to be fully active,” says Jason Romano, a partner at Moss Adams Wealth Advisors in Los Angeles, referring to his firm’s approach to selecting asset managers. A committee at Moss Adams reviewed manager performance in various asset classes and selected portfolios.

But, Romano notes, frequent changes of portfolio managers irritated both the firm’s advisors and their clients. About six years ago, the firm began using passive strategies for about two-thirds of the equity portion of client portfolios. The result, says Romano, was lower fees and better performance.
“You can’t argue with the numbers,” he says.

Aye Soe would agree. As director of global research and design for S&P Dow Jones Indices, she oversees the semi-annual S&P Indices vs. Active (SPIVA) Funds Scorecard. The latest SPIVA results, through June 30 of this year, show that in only one domestic equity category, small-cap growth, managers edged out their benchmark over the previous 12 months. But just 50.46% of small-cap growth active managers beat the S&P SmallCap 600 Growth index. Nevertheless over the three- and five-year periods ending June 30, the index outperformed significantly.

That may surprise many advisors who believe that the domestic small-cap equities space is not efficient. “That is not the case,” says Soe.

But there are cases where active management can add value. International small-cap is one category where managers have “consistently outperformed the benchmark,” she says. Soe believes this is because fewer analysts cover the stocks in the asset class, providing “a lot of opportunities for managers to find undervalued and overvalued stocks.”

Romano says many advisors may hesitate to add passive funds to the portfolio mix because they fear that clients may believe they can do it on their own. That’s why he stresses planning and asset allocation activities. “I think that clients recognize that they can’t just do what we do,” he says.

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Joseph Lisanti

Joseph Lisanti

Joseph Lisanti, a Financial Planning contributing writer in New York, is a former editor-in-chief of Standard & Poor’s weekly investment advisory newsletter, The Outlook.