IS BUY-AND-HOLD DEAD?

Actively Passive?
By Craig Israelsen

The issue of active vs. passive investing typically centers on the nature of the actual investment product: “Is it an actively managed fund or a passive index fund?” However, this is only one aspect of the active vs. passive debate, and presents far too simplistic a view. There is a broader, macro issue that applies to the broad portfolio; namely, “How is the portfolio of actively managed funds or index funds managed over time?”


For example, if there is a large amount of turnover in a portfolio of index funds, it is an actively managed portfolio of passive index funds. Very simply, it is an “active-passive” portfolio. By contrast, an investor who purchases index funds using a buy-and-hold approach has a “passive-passive” portfolio. In short, it is possible to be an active manager of passive funds, or a passive manager of actively managed funds.


In sum, the terms “active” and “passive” can apply to the nature of the investment instrument level as well as how the instruments are managed at the portfolio level. Thus, a die-hard index fund advocate may be “passive” at the instrument level and “active” at the portfolio management level. Conversely, an investor who utilizes actively managed funds (i.e., instruments) may be passive in his ongoing management of actively managed funds. Viewed in this way, it’s difficult to determine which investor is passive and which one is active.


Here, we explore a twist on the classic active/passive debate by presenting theoretical parameters for the best-case and worst-case outcomes when actively managing a portfolio of passive index-based instruments.

For entire article:

http://www.indexuniverse.com/publications/journalofindexes/joi-articles/7027-actively-passive.html?utm_source=newsletter?utm_medium&utm_campaign=JOI

Journal of Indexes Articles
Hanuary February 2010