And the winner is ... well, it looks like a draw.
At least that’s the conclusion reached by a new study of the long-running debate over active and passive mutual funds. FundQuest, a firm that provides services to investment advisers, brokers and other financial services companies, looked at 30,000 mutual funds in 73 categories during the 30 years ended Feb. 28.
The study concluded that investors are best served by a mix of active and passive funds. But like many such studies, this one focused on investment returns, and investors may want to consider some other factors as well.
To back up, active funds use analysts and money managers to search for the most promising stocks or bonds. Passive funds, also called index funds, merely buy and hold the securities in a common market gauge, such as the Standard & Poor’s 500, seeking to match the market’s returns rather than beat them.
Passive funds tend to have much lower expense ratios because they do not have to pay all those experts. Many academic studies have concluded that passive funds offer the best long-term results, mainly because active managers cannot consistently pick enough market-beating investments to offset their higher expenses.
But there are exceptions. Among the 73 fund categories, FundQuest found that active funds did better in 23, passive ones in 22. In the remaining 28 categories, the two types did about the same. Categories in which active funds did better included communications and consumer staples stock funds, emerging-market bond funds, precious metals funds and many foreign-stock funds.
The active funds that did best tended to be in foreign markets and niche markets, such as funds that invested in growth stocks of small companies, or in precious-metals stocks. This seems consistent with a widely held view that active managers have a better chance of finding bargains in inefficient markets, where research and analysis is skimpy or prices are volatile because of thin trading.