As Oktibbeha County supervisors debate whether to spend or save between $55 million and $58 million from the sale of OCH Regional Medical Center, they face another question: How should the money be invested?
Special legislation is being considered to give the county more flexibility in its investment options.
Most investment strategies involve active or passive investments.
Active management involves selecting and trading individual stocks and bonds in an attempt to outperform a benchmark such as the S&P 500, according to Zachary Evens, a manager research analyst at Morningstar.
“They’ll do that by picking stocks they think will go up by more than the average S&P 500 stock … and avoid stocks they think will underperform,” Evens said.
Passive investment, often called index fund management, takes a different approach.
A passive fund tied to the S&P 500 automatically holds small portions of all 500 companies in the index. No decision-making is involved.
Active management is a popular choice in part because it offers greater flexibility in managing risk, Evens said.
“If they think rates will go down … they can position their portfolio to take advantage of that,” he said. “If they think a particular sector is going to do especially well, they can overweight that sector and … hope to outperform. So that is kind of the common argument for active management, is that the active managers have a better pulse on what’s going on in the market.”
Passive funds, while offering less control, typically have much lower fees, Evens said.
Morningstar’s semi-annual Active/Passive Barometer consistently finds that, after accounting for fees, passive funds outperform most active managers across the majority of U.S. market categories over time, Evens said.
“The research finds that over a 10-year period, in almost no U.S. categories, do actively managed funds beat their passively managed funds,” Evens said.
Evens noted that while most active funds underperform over long periods, some are successful in outperforming passive fund managers.
Hypothetical model
As a fun, but not necessarily scientific exercise, The Dispatch used artificial intelligence to help model the performance of the Lowndes County Reserve and Trust Fund from 2014 to 2024 against a hypothetical portfolio invested in the Vanguard S&P 500 ETF and the Vanguard Total Bond Market ETF.
Accounting for fees and the same withdrawals made to the actual fund, the hypothetical fund would have been worth nearly $10 million more than its actual value as of Dec. 31, 2024.
By contrast, if the funds had been invested entirely in a 30-year Treasury bond, largely considered the most conservative investment option available, the principal would have remained $30.8 million, but the fund would have consistently produced approximately $1 million a year in interest payments to the county.
“Investing totally in a stock index … comes with high risk and potentially high reward,” Evens said.
A portfolio fully invested before the COVID-19 market crash in early 2020 would have lost about 25% in a single month, he said, while one invested before the 2008 financial crisis would have seen losses exceeding 40%.
Many investors ultimately choose a blend of active and passive strategies, an approach used by Oxford and Lafayette counties.
Oxford’s reserve and trust fund principal has grown from $30 million in 2012 to about $44.6 million today, with nearly $12 million withdrawn. Lafayette County’s trust has grown from $20 million to about $24.9 million, with $4.64 million withdrawn.
“They won’t select one fund … they’ll select a handful of funds to meet diversification, income and return requirements,” Evens said.
That often means combining passive index funds for U.S. stocks while selecting an active manager in areas such as emerging markets or higher-risk bonds.
“The future is unknowable,” he said. “That’s why at the bottom of every fund company’s website, it says ‘Past performances are not an indication of future results.’ So I think that’s why it’s important for investors to stay diversified across asset classes and potentially across both active and passive.”
Publisher Peter Imes contributed to this report.
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