Passive Beats Active Again in 2024
By James Parkyn - PWL Capital - Montreal
Passive funds offer better results and a steadier path to navigate tough markets
It’s during challenging times like this that people find out what kind of investor they really are.
What is your tolerance for risk and volatility? Do you react to the headlines (which often means buying high and selling low)? Are you paralyzed by indecision—possibly missing opportunities because you’re waiting for the right time to act?
Mindset makes all the difference. When you adopt a long-term investor mindset, short-term macroeconomic events shouldn’t change your investment plan. Markets are out of our control and can’t be predicted—but you can control your own emotions and tune out the noise.
Sticking to the plan
Of course this isn’t always easy, and today’s volatility can test our discipline. At PWL, we like to keep in mind the words of the world’s most famous investor, Warren Buffett. He is a well-known advocate for tuning out the noise, managing emotions and sticking to a long-term investment plan.
As Mr. Buffett puts it, “Stocks are safe for the long-run and they’re very unsafe for tomorrow.”
This quote is a good jumping-off point to the topic of our latest Capital Topics podcast—passive versus active management.
80% of active funds underperformed
Readers of this blog will know we aren’t fans of market timing and active management. Two new reports add to the ample evidence supporting our view. The SPIVA Canada Scorecard measures the performance of actively managed Canadian funds against their benchmark or index.
This year’s findings are similar to the results we’ve written about in the past. Over 80% of active funds underperformed their benchmarks in 2024. This includes 72% of international equity funds, 89% of Canadian Equity funds and a remarkable 96% of Dividend and Income Equity funds.
This wasn’t just a fluke bad year, either. The underperformance generally gets worse with longer time horizons. Over 10 years, 93% of active funds underperformed their benchmarks, including 82% of Canadian Small and Mid-Cap funds and 100% of Canadian Focused Equity funds.
A minority of stocks drove most gains
The stark underperformance isn’t explained only by fees. Funds benchmarked against the S&P/TSX Composite Index underperformed by 4 percentage points last year, while funds benchmarked to the S&P World Index underperformed by 9 points. The active managers in the S&P World Index category left a third of the performance on the table last year since the benchmark gained 30%.
A key reason for the poor results, SPIVA found, is that “a minority of stocks drove most of the gains…. active stock selection delivered worse-than-random results….
“Opportunities to generate outperformance through astute stock selection, sector and capitalization tilts were present, but difficult to capture,” the report concluded. “Patterns of majority underperformance continue to illustrate the headwinds facing many active managers year after year.”
Just 4% of stocks generated wealth
The finding reinforces data we published last year that just 4% of stocks generated all U.S. stock market wealth from 1926 to 2023 above a risk-free investment in Treasuries. A majority of stocks—51.6%—actually had negative compound returns.
This means if you didn’t own those 4%, you would have lost out on the massive 22,940% gain in equities during that period. How do you ensure you own that 4%? Not through jumping in and out of stocks, but via owning the entire market with broadly diversified, passively managed index funds, as our clients do at PWL.
Only 22% of actively managed funds outperformed over 10 years
The story is similarly sad for actively managed funds in the U.S., according to the Morningstar U.S. Active vs Passive Barometer. The Morningstar report measures active fund performance against passive peers net of fees.
It found that 42% of actively managed mutual funds and exchange-traded funds beat their passive counterparts in 2024. Over 10 years, the underperformance was worse. Just 22% of active funds survived and beat their passive peers.
Our good friend and colleague Raymond Kerzerho nicely summed up the benefits of passively managed funds in his new report, “The Passive Versus Active Fund Monitor.”
“Passive funds offer advantages that active funds can hardly compete with, including lower management fees, lower transaction costs, consistently higher returns, transparency, tax efficiency, and peace of mind for investors,” Raymond wrote.
Passive funds grow quickly
It seems that investors have taken note of the overwhelming data about the advantages of passive funds.
Passive funds have increased their global market share every year for the past decade and now account for 43% of the market, up from 23% in 2015, according to Raymond’s report.
Even more impressively, passive funds’ assets under management worldwide have grown 291% to USD $21.8 trillion during that period. This rapid growth far outpaced that of active funds, which added a more modest 53% in assets, now totalling $28.3 trillion.
Focus on evidence
Raymond cautions, however, against the perception that “the whole market is turning passive.”
For one thing, many people own passive funds, but use them to actively trade—buying and selling to time the market. Doing so, they risk underperforming in the same way that active funds tend to.
Tough markets may test your nerves. But they can be a chance to revisit your risk comfort level and make sure your long-term investment plan is still in sync with your needs.
They’re also a good reminder that smart investing relies on evidence, not drama.
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