Sometimes it can be really difficult to discern the truth.

Whenever I hear about the “active/passive debate,” I can feel my blood pressure rising.

Let me ask you this:  Exclude everyone who makes money touting active management.  That includes brokers, pundits and most of the financial media.  Can you name anyone credible who has objectively looked at the data and concluded that trying to “beat the market” by stock picking, market timing or finding the next “hot” active fund manager is a responsible and intelligent way to invest?

I can’t.

The lengths active managers and others will go to keep you from paying attention to contrary data is alarming.

Lame excuses

Financial journalist, Larry Swedroe, does his usual excellent job of debunking excuses active managers make for their dismal track record in this blog post.  In 2014, these excuses included underperformance of small caps, and foreign stocks, falling interest rates and outflows from actively managed funds.

Of course, it’s precisely these unexpected events that active managers are supposed to anticipate.

I’m not blaming them for their inability to do so.  No one has this expertise to do so reliably and consistently.  My beef is their false claim that they can add value by predicting these events and reacting to them.

Lies

Here’s something more disturbing.

High priced investment consultants market their services to institutional investors by claiming their ability to “beat the market.”

One recently published study examined a data set sourced by the regulator in the United Kingdom.  It contained detailed records of institutional asset managers recommended by each of the six leading investment consultants for the period from 2006-2015.

When the authors of the study focused on the three large consultants who claimed outperformance, they found no outperformance of recommended managers, whereas the consultants themselves claim significant out-performance.

The difference between the claims of the consultants and the findings of the authors of the study, was significant: The weighted average of these claimed excess returns of 1.73% per year exceeds our estimation of their performance by 1.94% or 1.95% per year depending on whether we do the calculation before or after management fees.

This observation is damning:  Therefore, at least in aggregate returns, investment consultants appear, on average, to have no systematic skills in manager selection.

If these highly paid and well-qualified consultants don’t have this skill, do you really believe your broker does?

If these consultants distorted their track record, consider the possibility that others, desperate to keep you from investing in index funds, might do the same thing.

Don’t be fooled.

Resource of the Week

This article discusses the findings of the study referenced above.