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The eternal debate

Since Jim Bogle created the first index fund in 1976, there has been a debate on wether active management should be the integral part of an investor portfolio, allowing portfolio managers to exploit market inneficinecies, or simply track an index (passive investing) and embrace the market ups and downs, maintaining costs low under the assumption that picking the active fund that will outperform the market consistently is a nearly impossible task. The truth of the matter probably lies in the middle. The chart below shows the cyclical behavior of active and passive investing since 1974. As you can see since 2014, less than 50% of active funds have a outperformed the index in the U.S., measured using 5 year rolling returns, and currently only around 20% of them actually do the job. However, in the 70’s and 80’s, in the mid 90’s and during the first decade are of the 2000’s, active was the place to be. After the #gfc, Quantitative Easing flooded the market with money and severely affected the dispersion between stocks, making the job of a portfolio manager more challenging. As the Fed unwinds its massive balance sheet and extracts liquify from the system, we will likely see a resurgence of Active Management in favor of passive.

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