CHICAGO – Despite investors' continued shift toward passively managed funds, advisors would be well served to not abandon active strategies.

That was among the key takeaways from a panel on asset allocation at the Morningstar Investment Conference. Panelists Rob Lovelace, president of the Capital Research and Management at American Funds, Diana Strandberg, portfolio manager at Dodge & Cox and Joe Davis, global chief economist at Vanguard, all agreed that active and passively managed funds can co-exist – and investors may be better off for it.

 “The debate is not active vs. passive, but how they work together,” says Lovelace. And with markets soaring and continued economic uncertainty, “the big challenge is fear,” he says.

Strandberg added that it's crucial for investors to know exactly what they're working with and what they're paying for. “Regardless of whether you’re active or passive, you own a portfolio that is constructed by somebody,” she says.


There’s no denying the increased popularity of passive funds. Last year, passive funds saw inflows of $167 billion in assets, while active funds lost $98 billion to outflows, according to Morningstar Direct U.S. Asset Flows Update.

But amid this shift, the panelists agreed that active funds still have an important role. “There are active funds that have low fees, better returns and less volatility,” but investors are still wary, according to American Funds’ Lovelace. Part of the pressure for advisors to move toward passive funds comes from fees, as active funds are generally more expensive.

Even at Vanguard, which popularized passive investing in the 1970s, there's a feeling that active management may not be as dire as it appears. Even looking 10 years out, Vanguard's Davis says that the suggestion that active management is endangered would be “way premature.”  As long as alpha still exists for these funds, there will be a premium paid for it, he says.

Strandberg reiterates however, that depending entirely on active strategy may not be the best idea. “There is a lot of room for skilled active management,” she says, but as a “cohort.” While it’s unreasonable to expect asset managers to see growth every quarter, active management can be fruitful as a longer-term strategy. She says passive managers are more “rearview” oriented, while active managers are looking ahead “through a windshield.”

When choosing active managers, Lovelace suggests considering three elements: “Fees, track record, and people investing in their own funds.” While you don’t want to overpay or invest in a fund with a bad rap, investing in an active fund that its sponsor believes in can be a good sign.

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