Aktive, passive, eller en kombinasjon av fondstyper?

Active fund managers have had yet another rough year in beating their benchmarks. We've also seen a lot of investors moving into passive strategies.

So how should you think about implementing active or passive or both strategies in a portfolio? Here with me to offer some tips is Morningstar's Christine Benz, our director of personal finance.

Christine, thanks for joining me.

Christine Benz: Jason, great to be here.

Stipp: So this debate is very heated. We have partisans on both sides. There are some very clear lines in the strategies, but you say that, even though some people feel very strongly, you may or may not, and that's okay.

Benz: I think that's right. So, if people have firmly held views on this topic, if they are all index all the time or maybe they are comfortable holding actively managed funds or even picking their own stocks, that's fine. I'm not going to try to dissuade them from their viewpoints. In fact, I think one of the keys to being a successful investor is having a strategy that you believe in, and you're prepared to stick with it. But I do think that for a lot of investors, a successful portfolio might include components of both approaches. It may be anchored primarily in index products and use some active products or even individual stocks around the margins. I don't think that there is necessarily one single way to do it.

Stipp: So, Christine, in deciding whether you are going to be an active fund investor or a passive fund investor, or blending the two somehow, the first analysis that you really should do is a self-analysis. What kinds of things should you ask yourself about yourself in deciding active, passive, or some kind of blend?

Benz: I think you want to focus on three key things, Jason. The first is time. So, if you are a time-pressed individual, you don't have much time to devote to your portfolio on an ongoing basis or to selecting securities--for someone like that, I would say that using a portfolio that consists entirely or mainly of index funds is a good way to go. If you do have more time for that ongoing oversight and that initial selection, then maybe you can think about using some active-type investments.

The other key attribute you'd want to make sure you have is some acumen. Are you knowledgeable about how to pick investments? If you are someone whose main way of analyzing a fund is to look at how 10-year performance stacks up versus the peer group, that's not enough. You really need to be someone who is comfortable with all the data that we provide about funds. You need to make sure that you are willing to do that initial analysis and you understand the research that will go into that effort.

And last thing that I would point out that you'd want to have is the discipline to hang on through the inevitable weak periods that will accompany more active products, or if you are an individual stock-picker, your basket of stocks will inevitably underperform the market at various points in time. You need to be willing to put up with those periods of weak relative performance in exchange for the potential to outperform over the long haul. So, really those three attributes are the ones I would focus on when deciding how much of my portfolio to put in active versus passive products.

Stipp: And you mentioned as one of those points there, acumen. How can you know whether you're good at what you are attempting to do? What are some factors you can look at that might inform whether you're succeeding, for example, if you're following an active strategy?

Benz: I think that's a work in progress, Jason. So for all of us to the extent that we are incorporating active investments into our portfolio, I think it makes a lot of sense to check up on how you are actually doing, how good are your skills? And the best way I know of to do that is to set up a custom benchmark for yourself that more or less mirrors your own portfolio's asset allocation, but instead of using your actual holdings, you're using inexpensive ETFs or index funds, and just creating a very stripped-down portfolio. That way you can track, am I adding or subtracting value with my security selection? If, over a period of say five years or so, you really have not added value versus that blended benchmark, I think that's a good case for either switching to an all-index portfolio or making sure that the bulk of that portfolio is in index-type products.

Stipp: So important to keep tabs on whether you are making the right choices with the right active managers to make sure that you are adding that value you want as an active investor.

We've done some research, and we've also found that there are certain areas of the market where active managers seem to have a bit of an edge or they're able to add more value than in other areas. What should you know about that?

Benz: You're right. So some of our colleagues in Morningstar Investment Management have actually done some work in that area, and it's interesting because their research--and this research was done by John Thompson and Larry Cao, and some folks in Morningstar Investment Management--corroborates that "core and explore" approach that has gotten so popular in recent years. And essentially what their research shows is that within the large-cap, highly liquid stock space, that's a very good place to index, because when you look at the data on active fund performance, active managers really have not distinguished themselves versus market benchmarks.

Where active managers have done a little bit better is in the realm of mid- and small-caps as well as in emerging markets. So, in international large-cap developed markets, that's probably a better place to think about indexing. In emerging markets, active managers have, in fact, shown some ability to add value. So, small-caps, mid-caps, emerging markets might be spaces, if you wanted to include active products in your portfolio, it might be good to concentrate your efforts there.

Stipp: Last key concept: We know that index funds, if they track the same index, are pretty much the same. They're kind of commodity products in a way, though you want to look at expenses, obviously, which can be a big differentiator.

On the active side, though, not all active funds, even if they're following the same style box, are going to be the same kind of fund. They're not all comparable in that way. So what do you need to keep in mind as you're looking across the area that you want to invest in and you're looking at active funds, how can you distinguish them?

Benz: I think you want to look for a few key things in your active investments. First of all, you want to make sure that that fund is actually active. So we've seen lots of cases, especially with funds that have gotten very large, where they essentially just shadow their benchmark. They might make a few changes in their holdings, or underweight Microsoft versus the index. This was the case of Fidelity Magellan, for example, in earlier part of this decade, where it was a very index-conscious product.

The problem is, when you've got a fund that is doing something like that, and it also has significantly higher costs than an index fund might have, that's kind of a losing proposition from the get-go. It's very difficult for that index-shadowing product to actually add value versus a benchmark.

So you want to gauge how active it is; R-squared, which is available on Morningstar.com for individual funds, R-squared versus a relevant benchmark is a good statistic to look at. If you see a very high R-squared--say, you're looking at a large-cap stock fund with an R-squared of 95 or higher--that's a good red flag that that fund's movements are closely correlated with the index. Maybe the manager isn't doing a lot to stick his or neck out to differentiate performance. So, look for that active-type strategy.

You also want to think about whether the fund has costs that are actually surmountable. So if you are using [active] products, the last thing you want is to have them hobbled by very high costs, because that can encourage the manager to take maybe outsized risks to compensate for those very high costs. So you want to give the manager a fighting shot at being able to beat that benchmark, and the best way to do that is to use an active strategy and also have semi-reasonable costs.

Stipp: Active versus passive a very heated debate, but certainly it seems like there are ways investors can blend both, or at least be better at one or the other. Thanks for joining me today, Christine, with those tips.

Benz: Thank you, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.