Ritholtz & Kaissar on Passive Versus Active Management

 In a recent online debate concerning active vs. passive investing, Bloomberg columnist Nir Kaissar and Ritholtz Wealth Management’s Barry Ritholtz offered a range of arguments and insights. Here are some highlights:

Cost and performance: While Ritholtz believes investors should allocate a “big chunk” of their portfolios to index investing because of lower costs and better performance, Kaissar argues that active (primarily for those focusing on value, quality and momentum) isn’t necessarily more expensive than passive. Rather, Kaissar says, many active managers have outperformed passive but “kept the profits for themselves” by charging high fees. Both agree, however, that “expensive and underperforming active gives the entire complex a bad name.”

Smart-beta investing: Kaissar believes this approach can help prevent investors from chasing “hot active managers to their detriment” because it allows them to “make long-term bets on active styles rather than active managers.” Ritholtz views this discussion as central to the debate. He argues, “Investors deserve most of the blame for poor results, due to not having a plan they can or want to stick with, chasing the hot hand, being emotional in their investments, and lastly, their lack of discipline in following their own plans.” Kaissar adds that active managers can be guilty of not clearly framing their performance results. “They typically wave around little more than dazzling returns,” he writes, without warning that such performance tends to be cyclical.