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Digital Subscriptions > > TRUMPING PASSIVE INVESTING

TRUMPING PASSIVE INVESTING

The odds of finding a winning stock on Wall Street may not be favourable – but that does not mean active investing is dead

Fund selector US equities

‘ Maybe US active investing is not dead after all’

Barely a month goes by without a news headline claiming that active managers have underperformed their index. In 2016, just one-third of US large-cap managers beat the S&P 500, according to data from S&P Dow Jones Indices.

The story does not stop with large-cap managers. The same study states that 89% of mid-cap managers and 86% of small-cap managers underperformed the S&P MidCap 400 and the S&P SmallCap 600, respectively.

It is little wonder that the US market share of passives is about 30%, with Moody’s suggesting it may comprise half of the market by 2021.

This is not a new phenomenon, and data charts a similar story of active underperformance for most time frames. Over the 15-year period to the end of last year, 92% of large-cap, 95% of mid-cap and 93% of smallcap managers trailed their benchmarks.

It makes intuitive and academic sense, too. The efficient market hypothesis dictates that shares always trade at fair value and, as such, each stock has a 50/50 chance of beating the market. The more times you ‘toss the coin’, the more challenging it becomes to repeatedly beat the index.

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