Integrating Active and Passive Management

Abstract

Many investors think of active and passive management as mutually exclusive approaches in investment management; they are proponents of either active or passive management. In the view of the authors, it is more useful to think of these investment management approaches as lying along a continuum, with passive management using index replication at one end of the continuum, and active management using aggressively concentrated portfolios at the other end. Both investment management approaches have benefits and shortcomings. By combining active and passive approaches to investment management, plan sponsors, foundations, and endowments can maximize the benefit potential and may minimize the shortcomings of each to improve overall portfolio results. The authors compare the two approaches, discuss their historical performance, and present a framework for combining the two on a strategic (long–run), tactical (medium–run), and dynamic (short–run) basis.