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Most Investors are Throwing Money Away


Investors in actively managed funds are losing money compared to those in passively managed funds. They are virtually throwing money away. The question is: Are you?

Throwing money away

Active investment managers are gasping for air. This year a full 90% failed to outperform their market benchmarks. Previous statistics have not been favorable as well. In the past, on average, 80% of passively managed index funds outpaced actively managed in any one year. When a longer time frame is considered, passive funds outperformed active funds by an even greater margin.

This means that investors in actively managed funds are losing money compared to those in passively managed funds. They are virtually throwing money away.

More People Throw Money Away than Not

Still, two-thirds of accounts in the United States are under active management. Apparently, clients feel helpless when it comes to money management and buy a story rather than objectively looking at statistics as to what an active manager can or cannot do for them. Or, if they are in actively managed funds already, they are immobilized by inertia and won’t or can’t take the time to ditch them for comparable passively managed options.

The Pendulum is Swinging

But happily, overall, people are progressively getting smarter. Sales of actively managed funds are decreasing and overall redemptions surpass sales. Eventually, the number of actively managed funds versus passive may be equal rather than skewed toward the managed variety. During this cross over, it is those who are able to make the change to passive management that likely will make more money rather than throwing it away.

Active Managers Fight the Fight

Active managers aren’t taking this lying down. It seems they have several methods of trying to deal with the statistics mentioned. One is that many of them are “closet indexers.” This means they largely select stocks from their relevant benchmark and therefore are more likely to match its performance. Clearly, here the client is not getting what she intended. And, of course with the cost of management, the investor still can’t meet the performance of the benchmark.

Another option that active managers are taking is to attempt to learn how to beat the market after their fees. For this, they are enrolling in training programs. For example, Denise Shull of The Rethink Group coaches active managers on how to enhance their performance using psychology and neuroscience principles.

Finally, some active managers are cutting their fees in an effort to attract business.

My Take

Occasionally, a rare active manager will beat her or his benchmark. Warren Buffet, for example, has done very well. There also is a newcomer on this scene, Thomas Murray. Mr. Murray works for AthenaInvest and reportedly his managed fund has increased in value 66% over the last 10 years compared to 38.8 for its benchmark, the Russell 2000. He does this by using a behavioral psychology approach and a limited number of stocks to produce a concentrated portfolio—exactly the opposite of prevalent investment wisdom. Whether Mr. Murray can continue his superman performance is anyone’s guess. His track record only spans 10 years and his approach flies in the face of common investment wisdom in that he is investing a portfolio of only 10 stocks rather than the traditional minimum of 30.

What we do know is that finding managers like Buffet is truly like finding a needle in a haystack. The best bet for most investors is simply to buy passive funds, use the principals of asset allocation and occasionally re-balance. In doing so, it has been possible to outpace funds that are known to give the impression that they can outperform but don’t, actively managed funds.

For More:

Make More Money as a Self-Investor

Advisor? What Advisor?

Taking Control of Your Finances

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Victor J. Dzau, MD, gives expert advice
Victor J. Dzau, MD, gives expert advice