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1 Themeasure of the performance of a portfolio after adjusting for risk. Alpha is NOT FDIC INSURED MAY LOSE VALUE
calculated by comparing the volatility of the portfolio and comparing it to some NO BANK GUARANTEE
benchmark. The alpha is the excess return of the portfolio over the benchmark.
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What Have You Done For Me Lately? From 2000 to 2009, active
Recency bias is the tendency to believe that recently observed patterns outperformed passive nine
will continue into the future, and its a powerful force that can inuence out of 10 times.
investor decisions. But investors who only take recent performance into
account are missing the forest for the trees. After all, yesterdays events FIGURE 1
shouldnt determine how tomorrows investment decisions are made. No Clear Winner in Active vs. Passive
Large-Cap Funds
Morningstar Large Blend is the largest Morningstar category, with $1.98
Winner
trillion in net asset size, constituting 16% of the U.S. mutual fund market.2
We selected this category because it is widely believed to be the most Active
ecientthe one in which active investing supposedly makes the least Large Blend S&P 500
Categor y (%) Index Funds (%)
sense. To represent active, we removed all index funds and enhanced index
1985 29.52 30.4 8
funds. For passive, we used the Morningstar S&P 500 Tracking category.
1986 17.99 16.82
As shown in FIGURE 1, passive large-blend strategies have outperformed 1987 2.80 4.13
active large-blend strategies in four of the last ve years, which helps to 1988 15.94 15.52
explain why in 2016 passive U.S. equity funds had inows of $239 billion, 1989 27.59 29. 32
while more than $249 billion under active management headed for the 1990 -3.37 -3.27
exits. 3 1991 32 .56 29.29
1992 9.56 7.01
But the past ve years only tell part of the story. A wider look at the 1993 12 .69 9.45
chart reveals active and passive have traded the lead in performance 1994 - 0.81 0.83
1995 33.21 36.72
over time like two evenly matched racehorses. From 2000 to 2009, active
1996 22.25 22 .41
outperformed passive nine out of 10 times. During the decade before
1997 30.15 32 .6 4
that, passive outperformed active seven out of 10 times. And over the 1998 20.18 28.15
course of the past 32 years, active outperformed 15 times, while passive 1999 18.72 20.28
outperformed 17 times. 2000 0.16 -9.47
2001 -7.98 -12.37
Weve seen that the cyclical nature of active vs. passive investing denitely 2002 -20.47 -22.48
applies to the Morningstar Large Blend Category. The same holds true 2003 29.21 27.91
for other investment categories such as mid-caps, small-caps, and global/ 2004 11.03 10.30
international equities. And just like performance, investor sentiment 2005 6.86 4.39
2006 14.70 15.17
moves in cycles. If a certain style or asset class is doing well, investors
2007 6.76 4.95
are quick to extol its virtues and pour their money into it. Its no surprise,
2008 -36.93 -37.27
then, that passive investing is the new darling of many investors and
2009 28.62 25.97
much of the nancial press. But just as a marathon isnt decided by the 2010 14.28 14.4 8
nal 100 yards alone, we believe the dismissal of active management 2011 - 0.66 1.59
based on recent performance alone could be imprudent. 2012 15.16 15. 39
2013 31.96 31.68
2014 11.02 13.06
2015 -1.12 0.85
2016 9.99 11. 39
All investments are subject to risks, including the possible loss of principal. Performance data quoted represents past
performance and does not guarantee future results.
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The story that FIGURES 1 and 2 tell is clear. Just when The Active-Share Spectrum
it seems that active or passive has permanently pulled
ahead, markets change, performance trends reverse, INDEX CLOSET INDEXER ACTIVE
and the futility inherent in declaring a winner in active 0% 20% 40% 60% 80% 100%
vs. passive is revealed anew.
FIGURE 2
Active and Passive Outperformance Trends Are Cyclical
Morningstar Percentile Rankings Large Blend Category
10
20
30
40
50
60
70
80
Actively Managed Large Blend Passively Managed Large Blend
90
12/31/85
12/31/86
12/31/87
12/31/88
12/31/89
12/31/90
12/31/91
12/31/92
12/31/93
12/31/94
12/31/95
12/31/96
12/31/97
12/31/98
12/31/99
12/31/00
12/31/01
12/31/02
12/31/03
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
2,500
3 43% Higher
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Home Runs: Part of the Cycle In FIGURE 3, weve ranked the past 32 years from highest
to lowest in terms of which stocks within the S&P 500 Index
Active/passive cyclicality is further demonstrated with high
had the most home runs. The average number of home
and low amounts of stock home runsthat is, a stock that
runs during this time period was 213. Sure enough, in years
outperforms the benchmark by 25% or more. Markets that
that feature a high number of home runs, active tended to
feature large amounts of home runs signal dispersion in stock
outperform. And when there were fewer standouts, passive
returns. High dispersion should benet active managers who
was the clear winner. Its just another example of how
can single out the winners, whereas a low number of home
the performance of active and passive management has
runs indicates stocks are moving together, which typically
remained faithful to cyclical trends.
benets passive management.
FIGURE 3
Active Managers Have Generally Outperformed in High Dispersion Markets
S&P 500 Index (1985 - 2016)
Active Outperforms
Home Runs % of HR % Active Outperform
2001 322 63% 70%
2000 305 59% 79%
1992 269 53% 61%
2002 272 53% 63%
2004 264 52% 56%
2010 253 50% 43%
2009 258 50% 61%
2005 243 48% 76%
2016 242 47% 31%
2011 232 46% 25%
2015 233 45% 28%
2014 231 45% 25%
1993 226 45% 64%
1994 227 4 4% 33%
1986 211 43% 53%
2007 218 43% 63%
1988 210 42% 55%
2003 209 41% 48%
1991 205 41% 56%
1987 201 41% 42%
1990 203 40% 51%
2013 198 39% 54%
1985 186 38% 40%
2012 182 36% 51%
2006 180 36% 46%
2008 184 35% 52%
1989 175 35% 35%
1997 155 30% 27%
1996 151 30% 43%
1999 135 26% 41%
1995 125 25% 24%
1998 114 22% 19%
Average 213 42%
Past performance is not indicative of future results. Indices are unmanaged and not
available for direct investment.
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-14.94
opportunities
-10 for active management, as well explore next.
During the peak of dot-com exuberance in 2000.
-20
-15.21
-30
0.26
-40
-50
-60
aged Large Blend Passively Managed Large Blend Active Strategy Average
-70
12/31/90
12/31/91
12/31/92
12/31/93
12/31/94
12/31/95
12/31/96
12/31/97
12/31/98
12/31/99
12/31/00
12/31/01
12/31/02
12/31/03
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
2,000 -10
12/00
12/01
12/02
12/03
12/04
12/05
12/06
12/07
12/08
12/09
12/10
12/11
12/12
12/13
12/14
12/15
12/16
Telecommunication
19.97 15.67 -22%
Ser vices
-14.94
Utilities 15.4 40.26 -15.21
21.03 36% Dates
Data Source: Morningstar, 1/17
Total Active Strategy Average
18.10 20.21 12%
Passive Strategy Average
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FIGURE 7
Index Funds: Individual Sectors Can Have Outsized Impact
1/1/2000 to 12/31/2000 S&P 500 Index Sectors
Just as we think declaring active management dead is There have been 22 market corrections over the past 30
premature, we dont contend that active management is the years, and active management outperformed passive
only suitable choice for investors. Far from it. We believe management in 16 out of 22 corrections.
that the choice between active and passive management is During market corrections, the exibility of active
not a zero-sum game, but that each has a place in investor management allows for reducing exposure on the
portfolios based on the individual needs and wants of the downside and ramping up exposure to capture alpha
investor. With that in mind, here are some conclusions to in the early stages of recovery.
take away from this piece:
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This information should not be considered investment advice or a All investments are subject to risks, including the possible
recommendation to buy/sell any security. In addition, it does not take into loss of principal.
account the specific investment objectives, tax and financial condition
of any specific person. This information has been prepared from sources Hartford Funds Distributors, LLC, Member FINRA.
believed reliable but the accuracy and completeness of the information WP287_0317 200337
cannot be guaranteed. This material and/or its contents are current at the
time of writing and are subject to change without notice. This material may
not be copied, photocopied or duplicated in any form or distributed in whole
or in part, for any purpose, without the express written consent of Hartford
Funds.