Active Versus Passive: How Did We Get Here Anyway?

When talking with clients these days, passive versus active management is the red-hot topic. Many point to underperformance by active managers in the past few years as proof that the days of the stock picker are numbered. What strikes me during these conversations is that so many investors take it as a foregone conclusion that index funds will continue to outperform regardless of the backdrop. But is that true? Based on this chart, the case could be made that the fate of passive investing’s performance is tied to how the Federal Reserve Board acts going forward.

Swamped by Easy Money
Heartland Advisors Value Investing Active Management Chart
Source: Evercore ISI and Standard & Poor's, 2003 to 2016
Difference from Passive S&P 500 Performance: Evercore ISI looked at a universe of 750-plus active managers with long-term open-end mutual funds, excluding affiliated fund of funds, and measured the median annual cumulative total return of that group. This performance was then measured against the annual change in the S&P 500 to evaluate whether there were excess returns generated for the period.
Past performance does not guarantee future results.
As shown, the average active manager was handily beating the S&P 500 Index prior to the Fed unleashing the power of Quantitative Easing. As the central bank’s balance sheet ballooned, so too did returns of the broad Index against fundamental portfolio managers. 
Intuitively, it makes sense. Excessive liquidity and low interest rates can paper over a lot of flaws at the company level. With businesses receiving little or no penalty for poor capital management or unhealthy debt, investors have been free to outsource investment decisions to index providers and turn their attention elsewhere.
Now that rates are rising and the Fed has signaled a commitment to shrinking its balance sheet—and, consequently, reducing the liquidity sloshing around the financial system—we think it is prudent for investors to reconsider their assumptions. As the old adage goes, past performance does not guarantee future results.


Please wait while we gather your results.


Heartland Advisors Value Investing Relationship Manager Michael Kops

Michael Kops

Kops is a Vice President and Partner. He has 14 years of industry experience, 8 at Heartland.

Email Sign Up

  • I am a financial professional or institutional investor
  • I am an individual investor

©2018 Heartland Advisors | 789 N. Water Street, Suite 500, Milwaukee, WI 53202 | Business Office: 414-347-7777 | Financial Professionals: 888-505-5180 | Individual Investors: 800-432-7856

Past performance does not guarantee future results.

Investing involves risk, including the potential loss of principal.

There is no guarantee that a particular investment strategy will be successful.

Value investments are subject to the risk that their intrinsic value may not be recognized by the broad market.

The statements and opinions expressed in the articles or appearances are those of the presenter. Any discussion of investments and investment strategies represents the presenters' views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. Any forecasts may not prove to be true.

Economic predictions are based on estimates and are subject to change.

Heartland’s investing glossary provides definitions for several terms used on this page.

ALPS Distributors, Inc., is not affiliated with Heartland Advisors.