Is the Case for Active Management Stronger in Retirement?

Investing in retirement requires portfolio growth to fuel income. Get it wrong and the size of your savings can quickly diminish. Are active funds better placed to protect against losses?

John Rekenthaler 25 September, 2015 | 12:45PM
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In retirement, when most investors are removing assets from a portfolio, avoiding market losses becomes particularly important. A steep decline in portfolio value coupled with investor withdrawals can lead to a death spiral, whereby the fund shrinks so much in size that it can no longer meet future withdrawal requests. Alterantively it may survive but in such diminished form that it cannot grow, as any recovery in its net asset value is used to pay the withdrawals. American Funds argues that active management is best suited to dodge these potentially debilitating losses.

Funds that do not capture the market's full losses are ideal retirement

The company posits that the top retirement managers will be those who boast the qualities identified in its 2014 paper on accumulation; low expenses and from an organisation where the investment managers tend to own a high amount of their own funds. These are clear benefits. They were proved to be positives in 2014's report Expect More From the Core and meet with the approval of none other than Vanguard's Jack Bogle. Low costs and managers with skin in the game are good things. 

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John Rekenthaler

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

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