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Where It Pays to Be an Active Fund Picker

Our study finds investors can have greater confidence in finding alpha-producing managers in some categories more than others.

If you've had your finger on the fund industry pulse recently, you are well aware that the active-versus-passive investing debate is alive and well. Unfortunately, it seems that many adherents on both sides of the aisle tend to advocate an all-or-nothing approach--either all passive or all active. However, a rational investor should take a more nuanced view where fees are weighed against the potential for outperformance in category-by-category consideration.

In what follows, I will provide a decision framework for the trade-off between the potential for outperformance offered by active management with the cost savings offered by passive management. In addition, I will discuss one method for determining which active fund industry segments may be worth considering for an active allocation.