Five charts to start your day

Active versus passive: will the war ever end?

BofA Global Research made an interesting chart about active versus passive investing. As of June 2024, only 43 percent of active funds worldwide did better than their benchmarks. This makes investors question if active investing is worth it.

Investors are always comparing returns with fees, and cheap passive funds are still very popular. But this trend might be hiding a risk that many investors aren't thinking about.

For the last 10 years, we've been in a market where growth stocks did well, helped by very low interest rates, especially during Covid. Now, interest rates have gone up a lot, and inflation is back after 40 years.

Usually, when this happens, the stock market should change. Companies should be valued differently because higher interest rates affect how their future cashflows are discounted. Also, we can't assume companies will keep growing as fast in the future.

Making things more complicated, there's a lot of excitement about AI stocks. We might be in a bubble. If we are, and it bursts, just holding onto index funds (passive investing) could be risky.

This trend could continue for years. No one knows when the next big drop in the market will happen, or how much money could be made by sticking with index funds until then. But there is a risk, and risks need to be managed. Passive investing doesn't manage this risk. Even though the chart shows passive funds doing well, what happened in the past doesn't always tell us what will happen in the future.

Source: BofA Research

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