The debate over the merits of active and passive investing has been going on for some time. Yet the
evolving needs of investors mean many financial professionals want the flexibility to use both strategies
in the investment planning process.
Let’s look at the two strategies. Most passively
managed funds seek to match the return of a market
index, essentially tracking an average. Active
managers, however, seek to outperform the returns
of index averages by managing securities selections
and seeking opportunities using research techniques
that go beyond tracking an index. Active and passive
investing strategies are not mutually exclusive and
many investors have an allocation to both in their
portfolios. Ivy Investments offers passively managed
funds, but we are guided by the belief investors can
derive the most long-term benefit through exposure to
well-researched actively managed funds.
Why? In our experience, investors don’t set “average”
goals. They put a priority on important milestones in
their lives. When it comes to investing for those major
goals, the right information can make a meaningful
difference in going beyond average results.
In this review, we take a closer look at Ivy’s
commitment to active management and the reasons
we believe it can provide benefits to investors.
With decades of experience in actively managing
money for investors, we’ve learned that differentiated
ideas, skilled interpretation of data and experienced
professionals are important to successful investing
Our portfolio managers and analysts conduct their
own original research, every day. They don’t simply
repackage the work of others. By doing our own
homework, we have greater latitude on security
selection, which includes identifying opportunities
that could be ignored by passive strategies.
This approach leads to individual ideas, collaboration
and conviction in the holdings we select. Active
investment options typically have higher expenses
than passive, but there is more at stake for investors
than simply the cost.
Active selection of fund holdings
We believe it is best to know and understand what you
own. Because we do our own research, our funds tend
to be more concentrated. For example, Ivy’s suite of
equity funds average 53 holdings in each portfolio.¹
In addition, 67% of our active portfolios have lower
turnover than their Morningstar peer group averages.¹
BREAKDOWN OF S&P 500 INDEX HOLDINGS
Top holdings shown as average percentage of total index as of 03/31/2020
Consider funds based on the S&P 500 Index and
the several hundred stocks it represents. That many
holdings can make it difficult to understand exactly
where investment dollars are going and how they
are performing. As of March 31, 2020, the top 50
holdings within the S&P 500 Index on average
made up about 54% of the weight of the index.
The top 200 holdings — or 40% — made up about
85% of the index.¹
However measured, that concentration indicates
that index investors are not getting market exposurethat is as wide as the index name suggests. In addition,
holdings outside of these concentrated groups may hurt
performance in down markets more than they help in up
markets. Research shows that since the Great Depression,
the correlation of returns was greater in down months
than in up months — in other words, stocks tended to
move down together. And even in up markets, index
investors lose the chance to achieve more than average
returns. That may be because of large investors taking
short positions in exchange-traded funds (ETFs) and other
pooled vehicles to get defensive when the market falls.
From 2008 through 2019, the correlations increased,
especially in down months.² Indexes that track the
market overall reflect those close correlations, while
actively managed funds have the opportunity to be
Active management offers potential in rising and falling markets
The “efficient markets theory” states that the prices
of stocks and other securities fully reflect all available
information at any time. According to the theory,
investors find it very difficult to identify securities
that allow them to consistently perform better than
But history shows that markets often are not efficient.
Certain categories of mutual funds historically have
presented particular opportunities for active managers
to outperform. In general, these categories often are
considered less efficient in terms of the information
available about the types of securities they represent.
In addition, investor behavior can exert a direct impact
on prices and markets. Stock market volatility in reaction
to geopolitical uncertainty or other factors often has
lasted a relatively short time and shown the potential of
careful stock selection.
Active managers have the ability to exploit potential
market inefficiencies, or to “overweight” or “underweight”
fund holdings in different proportions to a given index.
Based on that capability, we believe actively managed
funds offer the potential for above-market returns and
possible downside protection. That’s a combination the
index-tracking funds may have difficulty matching.
Many investors have shown they agree. Of the roughly
11,100 mutual funds and ETFs available at the end of
March 2020, approximately 8,600 were actively managed
and represented $14.3 trillion of the total $21.2 trillion
in assets under management.⁴
As of 03/31/2020.
We live in a time of global rebalancing, with rapid
economic growth in emerging markets, as well as
accelerating innovation in technology, health care and
other areas. These changes often bring opportunity
for the right companies and potentially for investors.
Ivy’s investment team uses a disciplined, collaborative
research process as part of our active approach to
finding potential opportunities for investors.
1 Source: Morningstar Direct as of 03/31/2020
2 Sources: Empirical Research Partners, S&P 500 Monthly Average Return Correlations, Small- and Large-Cap Growth Stocks, 1928–2016 ; Morningstar Direct, 1928–2018
3 Source: University of Chicago Booth School of Business, www.chicagobooth.edu
4 Source: Strategic Insight Simfund, mutual funds and exchange traded funds, as of 03/31/2020
Past performance is not a guarantee of future results. Investment return and principal value will fluctuate, and it is possible to lose money by investing. International investing involves additional risks, including
currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets.
The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-capitalization U.S. equity market. It is not possible to invest directly in an index.
The opinions expressed are those of Ivy Investment Management Company and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are
subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a
recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs,
risk tolerance and time horizon.