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Investing: Active Vs Index - Index beats most over 10 years

Investing: Active Vs Index - Index beats most over 10 years

Index outperforms most Australian active funds - except small caps (2006-2016)


General Advice Disclaimer - Please read!

The S&P Dow Jones Indices has been the quasi-scorekeeper of the ongoing debate on active investing versus passive debate. While the report will not end the debate on active versus passive investing in Australia, the report makes a meaningful contribution by examining market segments in which one strategy works better than the other.

There is nothing new about the index versus active debate. It has been a contentious subject for decades, and there are few powerful believers on both sides, with the vast majority of market participants falling somewhere in between. 

Australian Active vs Index Year end 2016 [10 year annualised performance]

Source: SPIVA Australian Scorecard Year End 2016

The Score Card- Index outperformance 

In the report above, the S&P 200 index outperformed 74% of active funds over a 10 year period. In fact, the only sector that the index underperformed its active counterparts was in the small & mid-cap category. In fact, the level of under-performance by the index is significant over the 10 year annualised returns with the difference of 1.96% (index) to 5.90 (active)

In my experience, most investors think that the purpose of a financial advisor is to find someone that will choose the highest performing funds or stocks, or even the ability to pick market tops and bottoms in order to help clients time entries into the market. At the end of the day, a financial adviser should be advising on an appropriate asset allocation strategy that creates the highest probability of matching your financial goals with market risk and time horizons. If you are only paying for Alpha (out performance) to your financial advisor then perhaps you need to think again.