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Rekenthaler Report

Examining the Results: Lower-Cost Active Management

Closing the gap with passive management.

Domestic Equity Funds
You know that passively managed funds tend to outperform actively run funds. That long ago ceased to be news. Nor is it novel to suggest that as actively managed funds go, lower-cost versions are preferable. What has been less discussed, however, is how passive funds stack up against lower-cost active funds. I’ve addressed the subject a few times, once when comparing the results for Vanguard’s active funds against its passive funds and then when reviewing an American Funds study. Today’s article expands upon those efforts by looking across the industry at several asset classes.

The numbers come from Morningstar’s Active/Passive Barometer, published in June 2015. That paper examined the performance of nine style-box categories of U.S. stock funds, foreign large-blend funds, emerging-markets stock funds, and intermediate-bond funds over various periods, sorted in various ways. This column is the Reader’s Digest version (I just dated myself there). It looks only at the longest of the time periods; restricts itself to two key calculations; and shrinks the U.S. stock funds down to the three groups of large, mid-size, and small.