Spotlighting Common Methodological Biases in Active-Vs.-Passive Studies

Blanchett, David M.; Israelsen, Craig L.
November 2007
Journal of Financial Planning;Nov2007, Vol. 20 Issue 11, p64
Academic Journal
The debate over active versus passive investing is confounded by several issues that are not always recognized or dealt with properly. Our article highlights the deficiencies common in studies on the benefits of active management, which include (1) problematic survivor bias methodology, (2) counting funds rather than fund assets, (3) not accounting for multiple share classes, and (4) using a single index to represent passive index performance. This last issue is often referred to as index dependency. A recent article by Holmes (2007) dealing with the active-versus-passive debate contained several of these potential deficiencies, which likely influenced the results. We find considerable variation in the percentage of actively managed funds that beat indexes based on what indexes are used as benchmarks. Moreover, there are material differences in the results when using asset-weighted performance data of actively managed funds rather than simply conducting a head count, and when properly accounting for funds with multiple share classes.


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