Over the last few years passive funds have significantly increased their share of global assets under management. I have tried to stay out of the active versus passive debate, but have had so many questions from clients on this topic of late that the time has come for me to give my two cents and try to debunk a few myths. UNPACKING THE SALES PITCH FOR PASSIVE FUNDS The passive sales pitch typically goes as follows: 1. Markets are efficient. 2. Most active managers underperform the market. 3. The odds of selecting those active managers that will outperform in the future are not good.
It is a compelling sales pitch, until one slows it down and unpacks it:
First, the pitch leaves one with the impression that passive funds deliver returns very close to those of the market, when this is often not the case: At the risk of making an obvious point we should note that while many active managers t ypically do underperform the market, 100% of passive funds underperform the market – 100% of the time. This is a mathematical certainty. Passive funds endeavour to replicate their benchmarks. After costs, it is their destiny to underperform those benchmarks. The less well-known point is that the performance gap for passive funds is a lot bigger than