In an interview with Morningstar, Vanguard’s Daniel Wallick shares his perspective on how investors can successfully use active management.

With respect to investors becoming “a bit disillusioned” when they see the success rates of active versus passive benchmarks, Wallick argues that costs should be a primary consideration. “Lower cost funds,” Wallick says, “by and large do better than higher-cost funds. Now that alone does not guarantee success even with active funds, but it is the one statistically significant factor that we can identify as helping investors.”

But cost shouldn’t be the only consideration. “You have to marry top talent with low costs,” he argues, adding that understanding the process, philosophy and the experience of a manager is paramount albeit time-consuming. “It’s fairly challenging,” he says, “for any of us to be sitting at home with the Sunday paper and trying to identify a successful active manager. It really takes a lot of time and effort.”

Even when a manager passes muster, Wallick asserts, the investor must have staying-power through periods of underperformance. “Talent is from the manager; cost is from the manager; patience is from us as investors. We ultimately have to be patient.”