Active vs Passive is the Wrong Question

Rather than pit active funds against passive funds, investors should distinguish between funds that deserve a place in their portfolio and those that do not

John Rekenthaler 27 August, 2014 | 3:07PM

Two weeks ago I asked, Do Active Funds Have a Future? Several readers found that to be a silly question. There are good funds of each flavour, they argued. Rather than pit active funds against passive funds, I should distinguish between deserving funds and those that are not.
I agree.

That column discussed what is, not what should be. And what is, is a public relations thrashing. Index-fund managers have convinced the marketplace that the critical investment issue is whether to be passive or active. The triumph of indexing has become a familiar tale, active management is regarded as a losers' game.

That belief, however, is incomplete. It's true that active management sold at its customarily steep price is second-rate. But so are high-cost index funds. There are more of them than you would think, although most such funds have few assets. How a fund is managed is less important than its cost headwind.

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John Rekenthaler

John Rekenthaler  John Rekenthaler is vice president of research for Morningstar.

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