Active Funds Underperform During Pandemic-Related Market Fluctuations
A Missed Opportunity
The COVID-19 pandemic has triggered a period of unprecedented market volatility. The dramatic selloff and historic comeback of major equity indices could have been an opportunity for active funds to outperform passive funds. However, this was not the case.
A study of roughly 4,400 active and passive funds invested in multiple categories showed that during the first half of 2020, only 51% of active funds performed better than their passive peers.
Of active funds specializing in stocks, only 48% outperformed their passive counterparts during the first two quarters of the year. This was the exact same success rate seen for active investments during 2019’s bull run.
What Is Active and Passive Investing?
Active investing is a hands-on money management strategy. The goal of this approach is to leverage short-term changes in asset prices. Typically, a portfolio manager and a team of analysts will be “actively” engaging with the buying, selling, and allocation of a certain investment or set of investments. They will watch for qualitative and quantitative signs that prices will change in order to try to determine the best course of action, with the ultimate goal of beating the stock market’s average returns.
In contrast, passive investing uses a “buy-and-hold” approach. Money is put in an investment and it stays there—regardless of fluctuations in asset prices. Index funds are a common example of a passive investment. These funds follow major indices like the S&P 500 and the Dow Jones.
Achieving long-term success with active investing is no easy feat. Over the past 10 years, just 24% of active funds have had higher returns than their passive peers.
Investors have been transitioning from active funds to passive funds over the past decade for a few reasons, one of which is fees. Active fund management is generally more expensive than passive investing, which is something investors take into account. This trend could be accelerated because of the fact that most active funds have not been able to take advantage of the market’s recent choppy stretch.
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