The Active-Passive Debate: Market Cyclicality and Leadership Volatility

Executive summary. Since the advent of indexing as an investment strategy, there has been a robust debate over the merits of actively and passively managed funds. As a result, at various times throughout the year, an investor is likely to hear that some percentage of actively managed funds have outperformed the stock market over a given period of time.1 If during the period a majority of active managers have underperformed the market, the common opinion is that indexing is a superior strategy. If a majority of active managers have outperformed the market, we hear the reverse: that the way to add value going forward is through active investment management. But with leadership changes common, it’s easy to see how an investor may be confused about whether indexing or active management is the better choice in seeking higher returns. And a natural follow-up question is: Why can leadership change so dramatically?