Active versus passive: At opposite ends of the research spectrum

The rise of passive investing has attracted a lot of attention in recent quarters, with assets flowing into passive strategies at an accelerating pace. However, for investors who put a premium on research-based, selective portfolios that can become defensive during market downturns, active management can provide a valuable service.

Gaining an edge by gathering information

For most types of strategies, the distinctions between active and passive investing appear at the very core of the research process. For instance, when evaluating a company’s stock, active managers don’t stop at whether the stock is included in a particular index. They go further, analyzing the quality of the business, its deployment of capital, the stock’s valuation, and the overall condition of the company’s financial filings. They also look at trends in the company’s industry, meet with competitors, and conduct in-person interviews with company executives.

We believe this type of scrutiny provides a more thorough picture of a company’s relative value than passive investing allows. What’s more, such fundamental analysis means that active managers don’t have to own every stock in a given index. Nuts-and-bolts research allows them to sort out specific securities, essentially curating a customized portfolio instead of robotically buying every index constituent. When it comes to portfolio construction, active managers tend to use a high degree of selectivity.

Planning for downside protection

Passive and active strategies are on opposite sides of the fence when it comes to preparing for the inevitable downturns that follow long advances in equity prices. With passive investments, investors are beholden to following along when indices retreat, as they did in dramatic fashion in the first weeks of 2016. Actively managed portfolios, however, can be flexible and tactical, adjusting portfolio holdings to achieve a defensive posture that seeks to accommodate market setbacks.

That being said, we don’t mean to discount the fact that index funds can be good at capturing market upside, and doing so while charging very low fees. But when markets step back — which they inevitably do — there may be little gratification in capturing 100% of an index's decline while paying a management fee for the privilege. Which brings us back to the notion that when investor sentiment changes course, or when markets are shocked by an external event, actively managed portfolios have the flexibility to respond.

Of course, no degree of active management can insure against periods of underperformance, but by virtue of their research-based allocations, active managers can take positions that are in tune with prevailing market conditions. This type of downside protection is often a key part of the value propositions put forth by many active strategies; no such protection exists within passive strategies. In light of this, we think it’s important to remember that markets are enjoying an extended bull run, and at some point, the rally will end. When that day arrives, defensiveness will matter, and active managers will be able to pursue it through research-intensive security selection that emphasizes:

  • company-level attributes that can generate support for their shares, independently of broader market downturns
  • a deep knowledge of each company’s core operations, focusing on the few select factors that matter most to the company’s competitiveness
  • a clinical approach to analyzing a portfolio’s overall risk exposure, avoiding the shortcomings of a follow-the-index mentality.

All in all, active managers will have the option of relying on deliberate, conscientious investing that is based on objective, pragmatic assessments of each portfolio holding.

A closing word on fees

Passive investing can seem like a natural option for investors who seek to minimize fees. It’s perfectly reasonable to be sensitive to fees, but it’s also worth asking if lower fees translate to better value for each dollar invested. We believe that on a dollar-for-dollar basis, active strategies — which can be dynamic and accommodative — can represent compelling value. (In other words, we think a dollar invested in an active strategy is working harder — and potentially generating more protection — than a dollar invested in a passive strategy.)

We think it makes sense to reiterate that active strategies focus on picking securities that managers view as the strongest ideas for their portfolios and that appear likely to contribute to strong performance versus a given index. What’s more, active managers have implicit tools for achieving a more defensive posture during periods of market stress, such as rotating away from higher-risk exposures. For investors who are willing to pay a few more basis points for such a conscientious approach to portfolio management, we believe active strategies are worth a look. This is particularly true in light of the rigidity and inflexibility that often define passive investing.

Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and summary prospectuses, which may be obtained by visiting or calling 877 693-3546. Investors should read the prospectus and the summary prospectus carefully before investing.


Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.

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