A report from Moody’s (referenced here) predicts that passive investments (index funds and exchange traded funds) will overtake the active market share no later than 2024.
Here’s my reaction: Why is it taking so long?
Read this, and then re-read it:
Moody’s points to the fact that the US active mutual fund industry has been in net outflows since 2007, driven by “investors’ growing awareness that, by definition, actively managed investments, in aggregate, cannot deliver above-average performance, and that investing is, therefore, a zero-sum game – for every winner, there must be a loser(s).
Net outflows for over a decade! At least some investors are getting the message that investing in actively managed funds is a “zero-sum game.”
You could get lucky and pick an outperforming actively managed mutual fund, but I don’t like your chances. Even if your chosen fund outperformed for a year or two, there’s no way to know whether its outperformance will persist.
A study in the U.K
A comprehensive study by the Financial Conduct Authority in the U.K. examined a number of issues involving active and passive funds.
The study found weak price competition among actively managed funds and high profit margins, with an average profit of 36%. Clearly, the business of actively managed funds is great – for the fund managers.
What about the investors in those funds?
Here are two critical findings:
Overall, our evidence suggests that actively managed investments do not outperform their benchmark after costs.
…the most expensive funds do not appear to perform better than other funds before or after costs. (my bold)
It has confounded many for a long time that investors pay more for underperformance.
In any other area of commerce, this wouldn’t happen. If the car salesperson said: I recommend this car over the less expensive model. It has worse gas mileage, doesn’t run as well and depreciates faster.
Would you buy it?
Don’t be the last one off the Titanic called active management. It “actively” transfers your money into their pocket.
Resource of the week
I highly recommend you read the Interim Report by the Financial Conduct Authority. It’s compelling.