active passive mgt

8/3/2019 Active Passive Mgt

1/17

ClientEducationResources

Evaluating Passive andActive Investing

Evaluating Passive andActive Investing


2/17


3/17

3

What is Passive Management?

Advantages of Passive Management Diversified, Risk-Controlled Exposure Lower Expenses and Improved Tax Efficiency Competitive Performance

Disadvantages of Passive Management Market Returns Only

No Ability to Defend Against Down Markets


4/174

What is Active Management?

Active Management In contrast to passive management, active management is an investment

strategy whereby managers attempt to add value over the returns of anindex by picking stocks based on models, insights, and analyticalresearch. Unlike passive managers, active managers will not seek tomatch the risk and return profile of an index. They believe that marketsare inefficient and, as a result, stocks are often mispriced. Active

managers try to identify market opportunities and exploit potential pricinginefficiencies to obtain excess return.

Advantages of Active Management Potential to Beat the Market Potential for Protection in Down Markets

Disadvantages of Active Management Higher Costs and Fees Risk and Unpredictability


5/175

Passive Market ShareContinues to Rise

Percent Fund Assets for Active, Index and Exchange Traded Funds

88.7% 87.5% 86.8% 85.0% 84.3% 83.5% 82.0% 79.4% 78.5%

9.3% 9.6% 10.5% 10.5%10.6% 10.7% 11.1% 11.3%

9.8%

1.5% 3.2% 3.5% 4.5% 5.3% 6.0% 7.3% 9.5% 10.2%

0%

10%

20%

30%

40%

50%

60%

70%

80%90%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Morningstar Direct, SSgA Strategy & Research, as of 12/31/2009Data is US open-end mutual funds and ETFs as defined by Morningstar. Mutual Funds used are exclusive of money market fundsand fund of funds.

% in Active Funds % in Index Funds % in ETFs


6/176

Expense Comparisons Active,Passive & Exchange Traded Funds

Source: Morningstar Average Net Expense Ratio for Active funds, Passive Index funds, andExchange Traded funds by size and style categories, SSgA Strategy & Research, as of 12/31/2009

When compared to passively managed investments, average fees for actively managed funds aresignificantly higher across most asset classes

The introduction of exchange traded products has made passive investing even more cost effective

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

A v e r a g e

N e t

E x p e n s e

R a t

i o

Active Funds Passive Funds ETF

Active Funds 1.35 1.39 1.30 1.50 1.48 1.39 1.51 1.62 1.54 0.98 1.56 1.80

Passive Funds 0.65 1.07 0.86 0.81 1.37 1.69 0.92 1.47 1.47 0.42 0.85 0.84

ETF 0.48 0.41 0.39 0.45 0.48 0.48 0.53 0.39 0.44 0.19 0.51 0.68

Large CapBlend

Large CapGrowth

Large CapValue

Mid CapBlend

Mid CapGrowth

Mid CapValue

Small CapBlend

Small Capgrowth

Small CapValue

FixedIncome

InternationalEmergingMarketsGrowth


7/177

8.6%

13.4%

6.4%

14.8%

11.3%

8.3%

4.1%

13.5%

8.4%

85.9%

24.8%

40.2%

20.4%

11.3%

17.4%

61.6%

7.5%

23.0%

84.7%

35.1%6.7%

8.2%

8.7%

54.7%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Fixed Income

International

Small Value

Small Blend

Mid Value

Mid Blend

Large Value

Large Blend

% Alpha % Outperform

Short Term: Percent of ActiveManagers Outperforming in 2009

Source: Morningstar Direct, SSgA Strategy & Research

Based on Morningstar data for the year 2009. Chart shows the % of active strategies that outperform the corresponding benchmark and the average excess return of theoutperforming managers. Mutual fund performance is net of fees; index performance is gross of fees. The following indexes were used as benchmarks: Dow Jones U.S. TotalStock Market Indexes for the respective domestic equities, the MSCI EAFE Index for international equities, the MSCI Emerging Markets Index for Emerging Market equities, andthe Barcap US Aggregate Bond Index for Fixed Income.

For illustrative purposes only. Past performance is not indicative of future results.

2009 proved to be a particularly difficult year for active managers as active funds underperformedacross most asset classes

Former relative strength for active managers in the growth style and smaller cap spaces showedweakness in 2009; while larger caps, value, and fixed income prevailed


8/178

Long Term: Percent of Active Managers Outperformingwith Average Excess Return for OutperformingFunds 15 Year Annualized Period


Based on Morningstar data for the past 15 years, ending December 31, 2009. Chart shows the % of active strategies that outperform the corresponding benchmark and the

average excess return of the outperforming managers. Mutual fund performance is net of fees; index performance is gross of fees. The following indexes were used asbenchmarks: Dow Jones U.S. Total Stock Market Indexes for the respective domestic equities, the MSCI EAFE Index for international equities and the MSCI Emerging MarketsIndex for Emerging Market equities and the BarCap US Aggregate Bond Index for Fixed Income, . For illustrative purposes only. Past performance is not indicative of future results.

For the 15-year period, the majority of active managers were only able to beat the correspondingbenchmark in two categories small cap growth and emerging markets

0.5%

1.3%

1.9%

1.2%

1.9%

1.6%

1.1%

1.5%

1.7%

0.9%

1.5%

11.5%

59.5%

36.6%

28.1%

61.3%

47.1%

31.3%

37.0%

17.5%

34.4%

29.6%1.2%37.6%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Fixed Income

International

Small Value

Small Blend

Mid Value

Mid Blend

Large Value

Large Blend

%Alpha %Outperform


9/179

1.3%

1.0%

1.3%

1.6%

1.9%

2.8%

1.9%

2.1%

2.5%

1.5%

1.7%

1.5%

88.5%

40.5%

63.4%

71.9%

38.7%

52.9%

68.8%

63.0%

82.5%

65.6%

62.4%

70.4%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Fixed Income

Emerging Markets

International

Small Value

Small Growth

Small Blend

Mid Value

Mid Growth

Mid Blend

Large Value

Large Growth

Large Blend

%Avg Underperformance %Underperform

Source: Morningstar Direct, SSgA Strategy & ResearchBased on Morningstar data for the past 15 years, ending December 31, 2009. Chart shows the % of active strategies that outperform the corresponding benchmark and the averageexcess return of the outperforming managers. Mutual fund performance is net of fees; index performance is gross of fees. The following indexes were used as benchmarks: Dow JonesU.S. Total Stock Market Indexes for the respective domestic equities, MSCI EAFE Index for international equities, MSCI Emerging Markets Index for Emerging Market equities and theBarCap US Aggregate Bond Index for Fixed Income. For illustrative purposes only. Past performance is not indicative of future results.

A different vantage point: Percent ofActive Managers Underperforming

Looking from the other side of the fence, we can see the percent of active managersunderperforming the corresponding benchmark, along with their average underperformanceof those underperforming funds for a 15 year annualized period.


10/171 0

A Closer Look at Fixed Income Active Performance


Based on Morningstar data for the past 15 years, ending December 31, 2009. *TIPs data for the past 10 years, ending December 31, 2009. Chart shows the % of active strategiesthat outperform the corresponding benchmark and the average excess return of the outperforming managers. Mutual fund performance is net of fees; index performance is gross of

fees. The following indexes were used as benchmarks: BarCap US Corporate High Yield Bond Index for High Yield, BarCap US Aggregate Government Bond Index for Government,BarCap US Government Inflation Linked Bond Index for TIPs, BarCap US Municipal Bond Index for Municipals. For illustrative purposes only. Past performance is not indicative offuture results.

Historically, active manager underperformance has been most extreme in fixed income,where less than 12% of the managers added value

8.5%

4.4%

7.7%

1.1%0.2%

1.1%0.4% 0.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

High Yield Government TIPs* Municipals

% Outperform % Avg. Excess Return


11/171 1

Large Cap Blend Funds Percent of ActiveManagers Outperforming (1995-2009)

Source: Morningstar Direct, Percent of Large Cap Blend Active managers that outperform the Dow Jones U.S. Total Stock Market Large Cap Index for time periods given.Members of the Morningstar Large Cap Blend Active universe include non index funds in the Morningstar US Large Blend category.

On a year-by-year basis the results vary considerably, ranging from as few as 14% to as manyas 87% active managers outperforming the Dow Jones US Total Stock Market Large Cap Index

14%

38%

19%15%

39%

70%

52%

40%37%

51%

28%

41%

55%

87%

47%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


12/171 2

Active Funds Inconsistency andVolatility of Excess Returns

Source: Morningstar Direct, Median Annual Performance of Active and Passive Large Cap Blend funds versus the S&P 500 Index. Mutual fundperformance is net of fees; index performance is gross of fees.

The amount of excess return for large cap blend active funds varies considerablyfrom year to year .

-1.9

6.6

-8.1

-5.4-4.8

-1.1-2.0 -1.6

-0.2

1.5

0.6

-0.8

1.41.4 1.3

-0.4-0.4-0.4-0.5-0.7-0.6-0.9 -0.7 -0.7 -0.5 -0.5 -0.5-0.3-0.2-0.5

-10.00

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Year

A n n u a l

E x c e s s

R e t u r n s

( % )

Active Fund Excess Returns Index Fund Excess Returns

Annual Excess Returns for Median Large Cap Blend Funds (Active and Passive)


13/17

1 3

Its Difficult to OutperformYear after Year

Source: Morningstar Direct, percentage Large Cap Blend funds outperforming for year 2004, subsequent percentage of outperformers for the same group of managersfor given time periods. Outperformance is relative to the Dow Jones U.S. Total Stock Market Large Cap Index. Members of the Morningstar Large Cap Blend Activeuniverse include non index funds in the Morningstar US Large Blend category. Mutual fund performance is net of fees; index performance is gross of fees.

In 2004, 38% of active large blend mutual funds outperformed by an average of 2.4%. Of thesemanagers who had outperformed, very few of them had success in consecutive years.

28.8%

9.2%

5.1%

0.5% 0.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2004-2005 2004-2006 2004-2007 2004-2008 2004-2009

Percentage of Funds Outperforming in Consecutive Years

P e r c e n

t a g e o

f O u

t p e r f o r m

i n g

F u n

d s


14/17

1 4

Passive vs. Active:A Decision Framework

Question 1:Do you believe that markets

are generally inefficient?

Question 2:Do you believe that there are some

managers who can consistently beat thebenchmark?

Yes

Yes

Yes

Active

No

Passive

NoPassive

No PassiveQuestion 3:

Do you believe that you canfind those managers?


15/17

1 5

Passive vs. Active: Key Findings

Active Management - appears to be most rewarding in less efficient, lessliquid areas of the markets Over the 15-year period referenced in slide 8, the following active strategies

tended to outperform their passive counterparts: Small cap blend

Small cap growth

Emerging markets

Passive Management - passive management seems most rewarding inmore efficient markets Over the same 15-year period, the following passive strategies tended to

outperform their active counterparts:

Core fixed income

Large cap value

Mid cap value

Small cap value

Developed international markets


16/17

1 6

Passive vs. Active: Key Findings

Keep in Mind

Active and passive management investment styles are not mutually exclusive.Sophisticated investors may benefit from incorporating both strategies intotheir portfolios.


17/17

1 7

DisclosureFOR PUBLIC USE.Passive management and the creation/redemption process can help minimize capital gainsdistributions.

Bond funds contain interest rate risk (as interest rates rise bond prices usually fall). There are

additional risks for funds that invest in mortgage-backed and asset-backed securities including therisk of issuer default; credit risk and inflation risk.

Foreign investments involve greater risks than U.S. investments, including political and economicrisks and the risk of currency fluctuations, all of which may be magnified in emerging markets.Investments in mid-sized companies may involve greater risks than those in larger, better knowncompanies, but may be less volatile than investments in smaller companies.

The views expressed here are those of State Street through the period ended March 31, 2010 andare subject to change at any time. These views should not be relied upon as investment advice, assecurities recommendations, or as an indication of trading intent on behalf of any State Streetinvestment product. It does not take into account any investor particular investment objectives,strategies, tax status or investment horizon. We encourage you to consult your tax or financialadvisor. Investment Strategies mentioned are for illustrative purposes only and may not be reliedupon as investment advice or as an indication of trading intent on behalf of any State Street product.SPDR is a registered trademark of Standard & Poors Financial, LLC (S&P). No financial productoffered by State Street Corporation or its affiliates is sponsored, endorsed, sold or promoted by S&P.

IBG-1650 Exp Date 12/31/2010

active passive mgt

Documents