Ac­tive pas­sive

Finweek English Edition - - IN MY VIEW -

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

Karl Lein­berger

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