By Jeff Terrell, CFA

bbt-perspectives-Fishing-Tips-for-Active-and-Passive-Investors-

The debate between which asset management style is best, active management or a passive index, can easily be compared to fly fishing vs. bobber fishing. Like the fly fisherman who carefully prepares for each trip, active managers conduct exhaustive research before carefully selecting which stocks to buy. Like bobber fishing, passive index investing requires little more than keeping the bobber wet. The plain truth is investors can achieve success using both active and passive investing strategies just like fishermen can catch fish with a fly or bobber.

Is Timing Everything?

Historically, each investment style has experienced multi-year cycles of outperformance versus the other. Index funds often outperform during prolonged bull markets and have thrived in this era of post-crisis Fed policy. The Fed’s 0-percent interest rate and quantitative easing programs caused high correlations among U.S. stocks, leading them to rise and fall with the same tide outperforming active managers along the way at record low levels of volatility.

Active funds often outperform during bear markets or times of economic stress like we saw in 2009-2010 but have struggled to beat their respective benchmarks for the last several years under easy Fed policy. As the Federal Reserve has begun reversing its accommodative monetary policy, markets are performing more naturally. The majority of large cap active fund managers are beating their benchmark in 2017 with fundamentals improving.

Are All Indexes the Same?

The innovation of the first index fund in 1975 led the evolution of the Exchange Traded Fund (ETF). The lines have blurred lately between a true index (S&P 500) and one of the manufactured quantitative indexes created by ETF providers to justify an underlying fund. There are many great choices out there but look before you buy.

What Should I Do?

The amount of research around the active/passive debate is vast. Proponents of each style will continue defending their respective positions. Alternating periods of outperformance for each style supports including both active and passive management styles in a well-diversified asset allocation portfolio since trying to time these cycles is ill advised.

Skilled active managers, like the fly fisherman, will continue to succeed over full market cycles, especially when conditions are challenging. Passive index strategies, like bobber fishing, will also continue to succeed over full market cycles simply by participating. Investors can succeed with both styles as long as they keep their hook in the water by staying invested.

For additional information on best practices for using active and passive investment strategies to achieve your objectives, contact your BB&T Wealth team.

By Jeff Terrell, CFA

bbt-perspectives-Fishing-Tips-for-Active-and-Passive-Investors-

The debate between which asset management style is best, active management or a passive index, can easily be compared to fly fishing vs. bobber fishing. Like the fly fisherman who carefully prepares for each trip, active managers conduct exhaustive research before carefully selecting which stocks to buy. Like bobber fishing, passive index investing requires little more than keeping the bobber wet. The plain truth is investors can achieve success using both active and passive investing strategies just like fishermen can catch fish with a fly or bobber.

Is Timing Everything?

Historically, each investment style has experienced multi-year cycles of outperformance versus the other. Index funds often outperform during prolonged bull markets and have thrived in this era of post-crisis Fed policy. The Fed’s 0-percent interest rate and quantitative easing programs caused high correlations among U.S. stocks, leading them to rise and fall with the same tide outperforming active managers along the way at record low levels of volatility.

Active funds often outperform during bear markets or times of economic stress like we saw in 2009-2010 but have struggled to beat their respective benchmarks for the last several years under easy Fed policy. As the Federal Reserve has begun reversing its accommodative monetary policy, markets are performing more naturally. The majority of large cap active fund managers are beating their benchmark in 2017 with fundamentals improving.

Are All Indexes the Same?

The innovation of the first index fund in 1975 led the evolution of the Exchange Traded Fund (ETF). The lines have blurred lately between a true index (S&P 500) and one of the manufactured quantitative indexes created by ETF providers to justify an underlying fund. There are many great choices out there but look before you buy.

What Should I Do?

The amount of research around the active/passive debate is vast. Proponents of each style will continue defending their respective positions. Alternating periods of outperformance for each style supports including both active and passive management styles in a well-diversified asset allocation portfolio since trying to time these cycles is ill advised.

Skilled active managers, like the fly fisherman, will continue to succeed over full market cycles, especially when conditions are challenging. Passive index strategies, like bobber fishing, will also continue to succeed over full market cycles simply by participating. Investors can succeed with both styles as long as they keep their hook in the water by staying invested.

For additional information on best practices for using active and passive investment strategies to achieve your objectives, contact your BB&T Wealth team.

About the Author

Jeff Terrell, CFA

Jeff Terrell, CFA

Senior Vice President

Jeff manages portfolios and communicates investment strategy for Wealth clients. He is a Chartered Financial Analyst (CFA) with more than 30 years of asset management experience and is a member of the Charlotte Wealth Team. Jeff authors BB&T Wealth’s “Market Monthly” publication that can be found at: bbtperspectives.com/market-news.