Active vs. Passive Strategies
After nearly 11 full years of economic growth, which peaked in February, the National Bureau of Economic Research said the economy officially entered a recession on June 8.
Passive funds have received considerable attention—and inflows—in retirement plans as their sponsors stay focused on reducing costs. The 2020 PLANSPONSOR Defined Contribution (DC) Survey indicates 79% of sponsors offer indexed/passive investments on their plan menu; these funds, however, frequently appear alongside active management options.
Often investment managers make the case that actively managed funds perform better in periods of market volatility and decline, lessening the swing on the downside, and that passively managed funds do well during bull markets.
How is the active/passive debate reflected in the first three quarters of 2020? According to MI Simfund, a platform of PLANADVISER’s parent company ISS, the market’s forward-looking nature often appears at conflict with the day’s news. Asset-weighted fund performance underlined the disconnect between recovering markets and a lagging economy. Active U.S. and international equity funds recorded marginally better downside protection than did index funds across the first quarter and slightly better outperformance in the second. Passive domestic equity funds conversely led performance across the third quarter.
Despite the rebound in equity markets, bond funds overwhelmingly led inflows from the second quarter of 2020 onward. Within active funds, this served as a return to trend. The asset class has been the leading active segment for multiple years and witnessed a pullback in the first quarter. In a sharper reversal from long-term activity, passive U.S. equity funds faced sharp outflows across the second and third quarters.
2020 Cumulative Returns, Q1–Q3
Cumulative |
Cumulative |
Cumulative |
|
Active Funds |
Q1 ’20 |
Q2 ’20 |
Q3 ’20 |
U.S. equity |
-0.19% |
21.83% |
8.17% |
International equity |
-0.22% |
20.07% |
8.20% |
Taxable bond |
-0.03% |
5.70% |
1.94% |
Tax-free bond |
-0.02% |
2.68% |
1.32% |
Index Funds |
Q1 ’20 |
Q2 ’20 |
Q3 ’20 |
U.S. equity |
-21.12% |
21.79% |
8.50% |
International equity |
-23.85% |
18.26% |
6.66% |
Taxable bond |
1.66% |
3.58% |
1.05% |
Tax-free bond |
-0.95% |
2.50% |
1.02% |
Returns are asset-weighted
2020 Asset Flows, Q1–Q3
Total Assets |
Net New |
Net New |
Net New |
|
Active Funds |
Q3 ’20 |
Q1 ’20 |
Q2 ’20 |
Q3 ’20 |
U.S. equity |
5,547,785 |
-106,631.6 |
-33,569.3 |
-98,857.0 |
International equity |
2,355,269 |
-25,659.0 |
-45,576.0 |
-29,303.9 |
Taxable bond |
3,106,796 |
-116,759.6 |
95,953.2 |
124,484.3 |
Tax-free bond |
845,365 |
-20,296.6 |
13,791.8 |
27,536.0 |
11,855,216 |
-269,346.8 |
30,599.8 |
23,859.4 |
|
Index Funds |
Q3 ’20 |
Q1 ’20 |
Q2 ’20 |
Q3 ’20 |
U.S. equity |
5,377,619 |
50,225.2 |
-32,725.4 |
-36,560.5 |
International equity |
1,413,582 |
33,140.9 |
-22,994.6 |
10,833.7 |
Taxable bond |
1,701,128 |
-39,803.6 |
100,786.5 |
81,896.6 |
Tax-free bond |
54,415 |
612.5 |
3,480.2 |
3,069.3 |
8,546,744 |
44,174.9 |
48,546.8 |
59,239.1 |
|
20,401,960 |
-225,171.9 |
79,146.5 |
83,098.5 |
Source: ISS MI Simfund