On March 27, NerdWallet, an online resource that aims to help consumers save money and make smarter investment decisions, released the results of a new analysis that, in part, sought to determine whether active or passive portfolio managers were more likely to outperform the market index.
In total, the study found that only 24 percent of professional investors beat the market over the last 10 years, and that controlling risk was an essential part of this strategy.
To take a closer look at risk, NerdWallet says it examined the volatility of returns over the last 10 years for more than 7,000 funds, ultimately finding that "active managers controlled risk more effectively than index managers."
NerdWallet's researchers used a simple measure of risk-adjusted return to make this calculation, dividing the return by risk. According to the source, the asset-weighted average volatility of returns to active managers was roughly 14 percent per year. By comparison, passive managers had a 16 percent rating on the same metric.
"While active managers slightly lag passive managers in after-fee return, the active managers are able to earn nearly the same returns with less risk," NerdWallet says.
Perhaps more interesting to those looking for financial risk management options, the publication examined whether small stocks brought higher returns along with their increased risk. Overall, the study said that, while the data confirms risk decreases as a company grows, lower returns from these investments don't always follow.
"Growth stocks significantly outperformed value stocks over the past decade, while maintaining without meaningfully higher levels of risk," the report noted.
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