The investment world has reached a watershed moment. Recently, one of the largest pension funds in the world announced that it was considering moving to an all-passive portfolio. For the average individual investor, this might seem like a “yawner” of a headline, but the eventual outcome has major implications for the most fundamental question in investing: Which is better—active or passive?
Simply put, active management is performed by those investors who believe that they can outperform “the market” by using fundamental and/or technical analysis to pick individual investments that will outperform a particular benchmark (e.g., S&P 500 Index). Passive management, on the other hand, does not try to beat the market. Rather, these investors attempt to capture the average market return with as little risk and expense as possible.
The California Public Employee Retirement System (CalPERS) is the big kahuna of pension funds. Just as you invest your 401(k) money in stocks and bonds, the professionals at CalPERS invest money for the teachers and other public servants of the State of California. Since they are responsible for over $250 billion in assets, it becomes headline news in the industry when they make a change. Currently, CalPERS has about 60% of their assets in passive strategies and 40% in active strategies.