Social Sharing
Extended Viewer
The Optimal Use of Passive Management
Mar 1, 1993
Passive management is a useful tool for managing the style biases introduced by specialized active managers. For many plan sponsors, the S&P 500 is probably not the best choice for this purpose. Style index funds offer a superior alternative to the S&P 500. Choosing an appropriate amount of the total fund to put into passive vehicles and allocating among alternatives depends on the sponsor's level of risk aversion, among other things. The sponsor needs to understand the tradeoffs among the amount allocated to passive management, the style bias reduction, and the reduction in expected active return. Arbitrary constraints imposed on the allocations to individual portfolios can greatly impair the sponsor's ability to get the best possible results.