Passive v Active: A Chief Investment Officers view: Part Two:

In part one I suggested that passive lends itself to short term investing and active long term. If you wish to read Part One you will find it here:

Looking at the UK in more detail

We are going to look at a core fund holding within Equip against the relevant benchmark index.  We are then going to look at monthly rolling periods to see when the active style outperforms and when the passive style outperforms.

What I am looking for is too see what effect the length of the rolling period has on the results.  Does a longer rolling period work in favour of the active style? 

 

1

The above chart shows the monthly returns of Artemis UK Special Situations and FTSE All Share.  The maximum number of periods we can chart is 60, which takes us back 5 years.  As you can see, the monthly distributions have fluctuated since August 2009, however most interestingly, is the slight advantage of active over passive, with active outperforming passive in 31 of the 60 periods.

On the basis of probability, you will have been marginally better off choosing the active style over passive.  Let us look at increasing the term of the rolling periods. 

2

 

Increasing the rolling periods to 1 year has given a different view to the chart, however the probability of whether active or passive outperforms has increased in favour of the active style.  In 38 of the 1 year rolling periods, active management has outperformed.  So increasing the investment term has favoured active management, albeit 1 year is still too short in my opinion.

3

 

We have now increased the rolling periods to 5 years, which is what I would consider to the bare minimum for longer term investing.  The trend has continued with the actively managed fund outperforming the index 43 times from the 60 periods.  This level of probability is associated with having a longer term investment frame and rhymes with our own investment philosophies.

Let us take this one step further and look at a true long term investment horizon of ten years, something we are rapidly approaching ourselves.

4

 

For rolling 10 year frames the number of periods is reduced to 53, as the fund launched in March 2000.  The trend of probability continues with the actively managed fund outperforming the index 100% of the time.  For information purposes, the cumulative performance since the fund launched looks like this:

5

So in this example of a core UK Equity fund against the FTSE All Share index, the probability of the passive or active outperforming over particular rolling periods is shown in the table below:

 

6

So while the debate over passive or active style is too close to call over the short term, it becomes clearer on the basis of probability over the longer term.

In the next article, I carry out the same analysis of the US market and present my summary.

 

Share:

2 thoughts on “Passive v Active: A Chief Investment Officers view: Part Two:

    • Yes, the outperformance is net of fees.

      Reply

Leave a Reply