Going Passive in Europe

If you hold a position on a subject that places you in the minority, it’s pretty nice when someone of substance enters the dialogue and supports your view. After investing hundreds of hours researching investment management, I am convinced that you, the investor, are best served by deploying your hard earned money in a low cost, passively managed portfolio. Unfortunately, the overwhelming majority of investment advisors would have you invest in an actively managed portfolio in attempt to capture returns that are greater than those of the broader markets.

This week in The Wall Street Journal, I came across an article that caught my attention, “In Europe, Are ‘Active’ Managers Worth It?” (June 3, 2009). Apparently European pension funds are questioning whether the performance they have experienced warrants the fees they pay firms to manage their assets. The Norwegian government recently dropped 16 of the 22 firms that managed its fixed income funds. Most of these firms practice active management and they all suffered substantial losses last year.

The governments of Italy, Holland, and Sweden have also shifted away from active management of their pensions. These countries are reducing fees and seeking better performance by shifting investments to passively managed funds. In the U.S., the California Public Employee Retirement System, one of the largest pensions in the world, has historically relied on passive investing in its publicly traded equity portfolio.

Those who advocate active management claim the strategy will minimize losses in a down market. However, as performance data become available, the record is showing that this did not happen during the recent stock market crash.

These massive pension funds are run by some of the smartest people in the global investment community. Their decisions to move away from active management serve to validate passive management.

If your portfolio is not currently passively managed, perhaps it’s time consider a change.