The value of active vs. passive management is a constant source of debate in the financial world, and lately this topic has been receiving renewed attention. On May 29th, The Wall Street Journal featured an editorial from Burton Malkiel titled You’re Paying Too Much for Investment Help, where Mr. Malkiel attacked management fees for burdening investors while adding little value.
Mr. Malkiel asserts that “Passive portfolios that held all the stocks in a broad-based market index have substantially outperformed the average active manager since 1980.” He goes on to describe the impact that fees can have on earnings, recommending investors consider index products as a way to avoid costs.
A recent Ignites piece, Vanguard Widens Its Flow Lead, published on May 20th offers evidence that investors agree with Mr. Malkiel’s assertion. The article states that Vanguard gained double the inflows as its next competitor, with the four top-selling funds all being the firm’s signature index products.
Vanguard’s Marketing Strategy
These inflows indicate that Vanguard is doing something right in getting its message out to investors. The firm has long promoted its “At-Cost” investing on the investor fund site, and recently Vanguard re-introduced the At Cost Café, an innovative promotion where the firm travels the nation selling cups of coffee at cost, to illustrate the benefits of cutting fees. The firm strongly ties its “at cost” message into its site, offering videos and interactive charts discussing costs. The message seems to be percolating into investors’ consciousness, as evidenced by the firm’s gains.
Vanguard At-Cost Café Promotional Site
So what can active managers do? Firms with a model based heavily on active management should get out and explain to consumers how they add value. Cost conscious investors want to be reassured that management brings stronger returns, and asset managers should speak directly to consumers to explain their strengths. BlackRock has positioned itself well in this regard, explaining the benefits of combining actively and passively managed funds in its institutional investor-only Model Portfolios.
The debate between active and passive management is unlikely to end any time soon. Investors appear to currently be focused on costs, and part of this can be attributed to the clear voices calling attention to costs. Active managers should be proactive in explaining how they add value to a portfolio.