Letters to the Editor
May 5, 2009

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Dear Editor:


Your article on Active vs. Passive was really weak.  Mr. Huebscher’s arguments don’t hold much water.  If those are the best rebuttals that you can provide to a very compelling research piece, then I am even more convinced that passive index funds are a better investment tool than active funds.


Let me respond to Mr. Huebscher’s three bullet point critiques:


  1. S&P’s equal-weighting methodology is fairer than a cap-weighted methodology.  It allows every active manager to display their acumen equally.  Mr. Huebscher’s argument is weak, but S&P could silence it by showing results both equal- and cap-weighted.  I suspect indices would still outperform regardless of the weighting.
  2. It does not matter whether S&P’s indices outperform those of other vendors.  If that is so, then it is perfectly fine to compare active funds to S&P index based funds.
  3. Cash should have had a positive impact in either the index fund (which doesn’t hold much cash) or the active fund (which I am presuming Mr. Huebscher thinks would hold more cash because the manager is smart).  But if the manager is making cognitive valuation errors with the securities he holds, then the negative effect of securities can/may more than offset the stable cash position.

It would be fun to see S&P issue a rebuttal to these weak critiques.


Jeffrey B. Broadhurst, MBA, CFA, CFP
Broadhurst Financial Advisors, Inc.
Lansdale, PA

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