Morningstar Advisor - February/March 2011 - (Page 12)

On Topic Do You Use Active or Passive Investment Strategies? Let us know your thoughts at ”I use mostly passive strategies. My approach is guided by four principles: diversify broadly, choose investments based on their ability to deliver asset-class returns, keep costs low, and be tax-efficient. Empirically, most mutual fund managers do not add value after adjusting for systematic risk. And it is difficult to identify the “value-adders” on an ex-ante basis. For this reason, passively managed funds form the core of most of our clients’ portfolios. In certain cases, Using asset-allocation models and indexes, clients get extremely low-cost investment plans that are easy to understand, minimize taxes, and allow for simple structured rebalancing.” John Farrell Delaware, OH Quick Poll (given Jan. 13, 874 responses) 1 Which is the better way to invest? Actively Passively Combination 27% 20% 53% active management may offer a superior alternative. For example, a local market index may be poorly designed, or a manager may be exceptional in a specialized area or offer better value than a comparable index product. I continually evaluate managers to select the best vehicles for each risk class, but passive strategies predominate.” James Dowd North Capital San Francisco, CA “I use 80% active strategies, 20% passive. I use active because our strategies consistently beat the market over five-plus-year periods. We apply them in a way to keep costs down (low turnover) and taxes low (by harvesting losses and not purchasing prior to distributions). We use passive strategies to keep us honest and as a cushion for when the active strategies are yielding below market.” Alex Feit GMJA Consultants Napa, CA 2 What are your biggest concerns about using active strategies? (Choose all that apply.) Costs Performance Style drift Manager turnover Closet indexing Philosophically opposed 73% 58% 37% 37% 35% 14% 3 What are your biggest concerns about using passive investments? (Choose all that apply.) Performance Tracking error Finding appropriate index Fear of not adding value for clients Philosophically opposed 44% 26% 33% 48% 14% ”At the moment, I am almost exclusively active. I believe we are in a market cycle where active will perform better. It is a time of winners and losers, and there are a lot of good companies that are mispriced.“ Allen Purkiss Purkiss Capital Advisors Ridgefield, CT “I use a combination of active and passive strategies. I generally use ETFs for my large-cap allocation along with two or three active managers. I use an ETF for preferred stocks and MLPs. I often use an ETF for fixed income and will supplement it with floating-rate bonds, active shortand intermediate-term municipal-bond managers, and active high-yield and globalbond managers.“ Bard Malovany Sagemark Consulting/Lincoln Financial Advisors Annandale, VA 4 Did the financial crisis cause you to reassess your views of active and passive investing? Yes No 5 What is your clients’ view of the active/passive debate? Clients want active strategies Clients want passive strategies Clients don’t care as long as they meet their goals 15% 7% 78% 29% 71% “After years of using traditional active mutual funds, I now use low-cost index ETFs for all my clients. 12 Morningstar Advisor February/March 2011

Table of Contents for the Digital Edition of Morningstar Advisor - February/March 2011

Morningstar Advisor - February/March 2011
Letter From the Editor
First, Do No Harm
Do You Use Active or Passive Investment Strategies?
Best of Both Worlds
How to Build an Index
Accountable Investor
Nice Guys Finish First
Four Picks for the Present
Investment Briefs
A New Guardrail Against Risk
Tech Loosens the Purse Strings (a Bit)
It’s More About Costs Than Active or Passive
Play Your Stars
In Between Active and Passive
Selling Beta as Alpha
The Weighting Game, and Other Puzzles of Indexing
Leaving the Nest
Redefining Credit Risk
Another Vote for Market-Based Credit-Risk Measures
Big Opportunities in Small-Cap Stocks
Benchmarks? What Benchmarks?
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
VA Sales Slide, but Assets on the Rise
Indexing’s Lunatic Fringe

Morningstar Advisor - February/March 2011