The debate over active money management or passive has gone into the realm of the unwinnable. Like Red Sox or Yankees, Democrats or Republicans, chocolate or vanilla. Morningstar’s Jeffrey Ptak sought to figure this one out himself. After being asked countless times by clients for the “one thing” someone should look for in deciding whether a portfolio manager is worth his salt, he came up with above five instead.
There are several variables. The most obvious one is cost.
“Expenses are more predictive than just about any other variable,” Ptak says. “The reason is simple–expenses lower a fund’s returns basis point for basis point. In a zero-sum world, that should place the cheap at a lasting advantage over the expensive. However, I tend to look at expenses for a second, often overlooked reason: They can tell you something about the way the fund firm thinks about investing and its responsibility to the investors it serves. Higher expenses tend to placate a fund company’s desire for instant gratification,” he wrote this week.
By contrast, lower expenses–which should pay off eventually in the form of better performance but not immediately–can signal that it’s a firm that has a patient, long-term orientation. “Put another way, if a fund company isn’t disciplined enough to price its products for long-term success, what would give you confidence that it’s disciplined enough to run money in a patient, thoughtful way?” he writes.
So, Disney or Universal? Active or passive funds?
Ptak doesn’t really have an answer for that, other than “both.”
“There’s not any one thing that successful active fund investing hinges on, but rather interrelated factors that should be evaluated separately and together,” he says.