Moving Beyond Active Vs. Passive Debate

October 07, 2014

In the active versus passive debate, it’s time to think outside the box.

This article is part of a regular series of thought-leadership pieces from some of the more-influential ETF strategists in the money management industry. Today's article is by K. Sean Clark, CFA, chief investment officer of Philadelphia-based Clark Capital Management.

It seems to me that there’s been an uptick in criticism against active management lately. And it’s not just coming from the passive managers; advisors, the press and even clients have joined in talking smack.

I understand businesses need to make hay while the sun is shining. And five years into a screaming bull market can make a lot of hay for passive managers. But are we doing right by clients when we recommend one methodology over the other? Should deciding between active and passive management styles be an “either-or” decision?

At Clark Capital, we don’t think so. In fact, we think the two styles complement each other, help build a more robust portfolio, and aid in risk management and diversification.

I’ll be clear—Clark Capital is an active manager. However, we advocate a blend of active and passive styles. In this way, we favor not only diversification of asset classes, but also diversification of methodologies. We don’t believe that shunning one investment approach entirely in favor of another is prudent; in our experience, investment styles typically perform differently in different market environments.

In fact, the 2013 Nobel Prize for Economics was shared by world-renowned professors with opposite views. In one corner was Eugene Fama, who is an advocate of passive investing; and in the other, Robert Shiller, who is an advocate of active management.

Spotlight On The Client: An Outcome-Oriented Approach

Advocates of passive-only investing often cite the fact that active managers typically underperform their benchmark in the long run after fees are accounted for. I’d argue that this statement takes the focus off the client and on to performance.

Is the question really about whether a manager can beat a benchmark or is it whether an investor reaches his retirement income needs?



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