Study: Passive Beats Active During Rising Stock Markets

(May 11, 2011) — Add Sweden to the list of markets where passive beats active, at least during times of rising stock markets, according to a new study by students at Uppsala University.

The research — conducted by Richard Widerståhl and Martin Jägerstad and reported by Affärsvärlden, a Stolkholm-based newspaper — analyzed how 36 actively managed Sweden funds performed against an index, comparing five separate periods in the years 1995-2010.

The study revealed that during periods when the stock market was on an upswing, actively-managed funds faced difficulty outperforming the index. However, during falling stock markets, actively-managed funds were more likely to outperform the index.

“With few exceptions the actively managed funds cannot sustain their performance compared to the index over the periods,” said Jägerstad, according to Global Pensions.

The active versus passive debate has been a popular topic within the institutional investor world. Jibing with the Stolkholm-based study, Lee Partridge, San Diego County Employees Retirement Association’s (SDCERA) outsourced portfolio strategist and CIO at Salient Partners, offered a skeptical tone. “We think that it’s important to get all the different strategies represented in a well-diversified portfolio…but are you really trying to bring in the return premium that comes from those strategies, or do you think the manager has skill over and above the strategy?,” he told aiCIO. “We think that both can be operable, but we’re fairly skeptical about skill. We think that skill really has to be proven and it’s very difficult to detect.”

Nevertheless, the findings by Uppsala University — reiterated by Partridge — contrasts with recent results by the Ontario Teachers’ Pension Plan (Teachers’). In April, the fund’s chief investment officer Neil Petroff, riding a 14% annual return in 2010, claimed the fund’s active strategy added more than C$23 billion to the bottom line since its inception in 1990.

In a wide-ranging interview with Petroff, the CIO of Canada’s third-biggest retirement-fund manager claimed: “If we were a passive fund, we’d be C$23.2 billion lower in value, with liabilities at the same level. That really speaks to the value of active management – you add value when you pay for active management.”