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Winning at Active Management by John Keefe, Michael A. Welhoelter, Steven D. Bleiberg, William W. Priest

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Chapter 4 The Great Investment Debate: Active or Passive Management?

Investing in the world’s financial markets is a varied, complex and important undertaking. Every investor should have a formal plan, in two parts: a philosophy or strategy for guiding the investment; and a methodology, or set of tactics, for carrying it out. A well-designed plan includes a viewpoint on how the financial markets should react to a range of developments in the real economy, what assets to invest in or avoid, and the likely range of returns a portfolio might earn, as well as yardsticks for measuring success or disappointment—a set of principles for monitoring the results, and signaling to the asset owners that they need to adjust the plan if something goes awry.1

For institutional investors, a reasoned investment policy statement is often a legal requirement, and certainly part of the overseers’ fiduciary duty. For many other investors, however, an investment philosophy may develop over time through trial and error, even unconsciously—not unlike an organizational culture. But developing an informed investment plan presumes a knowledge of the financial markets that many people lack, and this shortage has created the need for an enormous industry of investment consultants, managers and advisers for institutions, businesses, and individuals.

Of the many options investors face, in this discussion we are most concerned with the final stages of this complex portfolio decision tree—the crucial, practical ...

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