Tags: Vanguard | Phillips | passive | investing

Vanguard's Phillips: Passive Investing Has Plenty of Room to Grow

Wednesday, 27 Aug 2014 11:00 AM

By Dan Weil

More and more investors are opting for passive mutual funds and exchange-traded funds (ETFs), given the inability of most actively managed funds to beat their benchmarks over long periods of time and the lower fees of passive funds.

Chris Phillips, a senior analyst for Vanguard, the king of passive investing, thinks the trend will continue.

"Passive is definitely taking on the vast majority if not all of the cash flows in the last couple of years. Investors are fleeing the traditional type of active management, at least on the equities side," he tells MarketWatch.

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"But when all is said is done, passively managed products are still a significant minority of all the investable assets out there. So there’s still tremendous runway for passive strategies."

And you can actually use passive funds for an active investment strategy, Phillips says. For example, if you want an exposure to small-cap European biotechnology stocks, you can invest in an ETF that focuses on them.

"Technically that's passive, but [investors] would probably be using that in a very active way," he explains.

"If you want the chance to outperform [the market], you have to go active. . . . Because by going passive, you are basically saying that you want to get the benchmark return, less costs," Phillips notes.

"For investors who in an absolute sense want to actually try and outperform the market, they need to differ their portfolios from the market, and so they have to go active."

The growth of passive investing is working out quite well for Vanguard. Its assets under management have soared to a record of almost $3 trillion, The Wall Street Journal reports.

The firm was helped by a recommendation from Berkshire Hathaway CEO Warren Buffett. In his annual letter to Berkshire shareholders, he wrote that most investors would benefit from following the instructions in his will.

Those instructions are to "put 10 percent of the cash in short-term government bonds and 90 percent in a very low-cost S&P 500 index fund. (I suggest Vanguard's.)," Buffett said.

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