Active Management a sham

Moonwolf

This Bluesky post by Paul Lewis links to an FT article that describes Active fund management as a sham, paywalled but the post it includes a couple of relevant screenshots.

”Plenty of managers beat the index, sure. But was it skill or luck? If the former, you would expect persistent outperformance. The good ones would keep winning year after year. Alas, this was not the case. It never is.

Take whatever period or category you wish. For example, of the managers in the top quartile two years ago, none was in the top quartile for the next two years. Even of those in the top half in 2020, only 5 percent could stay there.”

https://bsky.app/profile/paullewismoney.bsky.social/post/3mbgpsoqdbs2m

Given that trackers have lower charges as well, is there any reason to be in managed funds?

dunstonh

Given that trackers have lower charges as well, is there any reason to be in managed funds?

Trackers have a high US equities content.   In the cycle to the end of 2024, anything with a high US weighting gave the best outcome.

Managed portfolios tend to give a bit more home bias. Sometimes small, sometimes a lot and many removed the bias in the latter years.       In 2025, US equities underperformed global and if we have entered the next cycle of US underperforming global (as they historically cycle each other) then trackers that are market cap will likely underperform portfolios that have lower US equity weightings.

Whether the portfolio is using managed funds or passive funds isn't really the issue.  It's been more about US vs global.   i.e. A managed portfolio can be made up entirely of trackers but the percentages allocated to US etc is where the difference has been and will be.

Managed funds (rather the portfolio) usually have a remit and if their remit is not fashionable at that time, they will underperform.    If it is fashionable, then they will outperform.   e.g. value vs growth.  between 2009-2024, growth was king.  Value was off the boil.    Trackers, on the whole, are catchalls and you get what you get on the benchmark they track.     

The Paul Lewis post links to a June 2023 article.  So,  around 15 years into a period where US equities have been the best place to be.

DRS1

The passive vs active debate has been going on for decades.  

Saying active is a sham suggests he may be talking about funds which are really just closet trackers but with active charges.  If so which funds is he talking about?

ColdIron

Moonwolf said:

Given that trackers have lower charges as well, is there any reason to be in managed funds?

I don't think Paul Lewis is particularly reliable when it comes to personal investing, he has some, let's say, contrarian views. But that aside I can think of a few obvious examples where active beats passive. Income generation, sure there are some trackers but they are few and far between. Some investment trusts provide income smoothing which trackers can't. Then there are things that are hard or impossible to track, e.g. private equity, property, infrastructure etc

It depends upon your objectives, trackers excel at some and fail at others, I use both

It's a salt or pepper argument as old as the hills. Few would use salt to the exclusion of pepper and vice versa. Horses for courses and all that

Secret2ndAccount

The question was whether Active Management is a sham. The answer is yes. That doesn't mean that all funds are a sham.
Suppose you wanted to invest in the FTSE100. You could go out and buy a little piece of each of 100 different companies in the correct proportions. However that comes with several downsides. You would pay 100 charges to buy (and eventually sell), and it would take a lot of your time to constantly rebalance by buying and selling more shares to keep the proportions in line with the index. So, instead, you purchase an index fund. The fund manager does all the work for you in exchange for a modest annual fee. Funds are a necessary and useful element of investing.
If a fund manager says to you "don't buy the index. I can beat the index" then it's a sham. He can't beat the index. He just wants your fee. Active funds make their money by collecting your fee, not by investing money well. If they were that good at investing, they would borrow money, invest it, and live off the gains - they wouldn't need your money at all. But they know that markets are hard to predict, and they can't be sure of making any gains. So they advertise cleverly, and live off your fees whether they make any gains or not.
If someone tells you they can beat an index, there is a very high probability that they won't. But you will pay them 1% instead of 0.2% for their trouble. Watching the TV yesterday, first reports for 2025 are in: 70% of active funds failed to beat their index last year. Over the long term that proportion will rise to over 90%. You are paying them fees for nothing.
If you want Growth or Value or Asia  or Small Cap  there are index funds available for all of those. Don't pay extra fees for active managers who will not do any better than the index.

Bostonerimus1

Active managers all say that they can beat the market ie. everyone says they can be above average, think about that.

Many people say that in small "inefficient" markets active funds are better than index trackers, but most people now invest globally and any perceived advantage that might have been gained because of a home bias will be pretty small....if it even exists. Active funds have higher fixed costs than index trackers and so I can't see a reason to use them for the vast majority of people. Just construct your asset allocation from inexpensive trackers and don't fiddle with it. Once you've taken the active step to construct a portfolio be passive in managing it.

Having said that if you have a specific goal like income many people turn to actively managed closed end funds that target dividends and a yields. A total return approach from an index fund portfolio is probably as good, if not better, but active funds will always have the psychological advantage over a tracker portfolio because people are paying a professional for their expertise in constructing an income portfolio. The crux of "active vs passive" is whether that expertise is worth anything. But as long as you avoid the active dogs, like Woodford, you'll probably be ok, it's just knowing which active funds are going to bark. This pithy truism from Jack Bogle comes to mind "In investing, you get what you don't pay for"...ending a sentence with a proposition, Bogle wasn't an English professor, but he did see the fallacy in active management and the vested interests that profited from it.

LHW99

Having said that if you have a specific goal like income many people turn to actively managed closed end funds that target dividends and a yields.

And for natural income (if you are in a position to use that) trackers are less helpful unless you are willing to sell units at regular intervals.That can mean selling into a falling market, hence selling more units to maintain an income level and having fewer left for the recovery.

I set up a portfolio over ten years ago, predicated on producing an income to top up other pensions. I have mainly used active funds, with currently one smaller co. global tracker to achieve that income and have now averaged 7.5% pa total return (unitised) with maximum increase in several years (including 2025) of >17%.

Fixing purely on a single fund type isn't necessarily useful - it just has to do the job you need.

Qyburn

Secret2ndAccount said:

Active funds make their money by collecting your fee, not by investing money well. If they were that good at investing, they would borrow money, invest it, and live off the gains - they wouldn't need your money at all. 

You could say exactly the same about managers of index funds, or IFAs come to that.

Bostonerimus1

LHW99 said:

Having said that if you have a specific goal like income many people turn to actively managed closed end funds that target dividends and a yields.

And for natural income (if you are in a position to use that) trackers are less helpful unless you are willing to sell units at regular intervals.That can mean selling into a falling market, hence selling more units to maintain an income level and having fewer left for the recovery.

I set up a portfolio over ten years ago, predicated on producing an income to top up other pensions. I have mainly used active funds, with currently one smaller co. global tracker to achieve that income and have now averaged 7.5% pa total return (unitised) with maximum increase in several years (including 2025) of >17%.

Fixing purely on a single fund type isn't necessarily useful - it just has to do the job you need.

A total return strategy from an index fund portfolio isn't that different from using an actively managed income fund or a closed end fund. There are some strategies and sectors that a closed end fund might be able to access that an index tracker can't, but I don't think that's much of a loss. Dividends result in a drop in stock price and that';s the same for a passive portfolio and an active income fund. You can DIY a similar asset allocation from an index fund portfolio and avoid the fees.

But it's the psychological advantage of actively managed funds that offer you a regular income every year that is attractive and ultimately the extreme of that is the annuity where you give up your capital for a guarantee of lifetime income. 

Over the last 10 years my index fund portfolio has produced an average annual return of 12%, with 3% of that coming from dividends/yields. There are plenty of strategies to help with DIY drawdown from such a portfolio and it can easily be biased to higher dividend and yields if that's what you want.

Secret2ndAccount

Qyburn said:

Secret2ndAccount said:

Active funds make their money by collecting your fee, not by investing money well. If they were that good at investing, they would borrow money, invest it, and live off the gains - they wouldn't need your money at all. 

You could say exactly the same about managers of index funds, or IFAs come to that.

Well I would say it about IFA's. Of course, they provide other services too. For instance, if your IFA handholds you through a downturn and persuades you not to sell all your equities, then that's a valuable service, and justifies some of their fee. IFA's though are completely guilty of constructing overly complex portfolios. A more cynical person might say they are deliberatly making it look complicated to justify their fees and convince you that it's too difficult to do it yourself.

An index is determined by a well established set of rules, outside of the fund manager's control. The fund manager's job is only to match the returns to those rules. There is little in the way of judgement involved. I accept that there are costs involved - buying, selling, reporting, compliance, ...  So it is fair that the fund charges a fee. For many investors it is cheaper to pay the fund's fee than to try to manually duplicate the index with a large number of purchases. Almost the only way for one index fund to compete with another is by charging a lower fee. This drives down charges. You can get index trackers for less than 0.2%.  It is true that the fund makes a profit from the fee, but the fee is justified, or at least it's as low as you can achieve. The fund manager can't try to persuade you that his index fund is better than that other index fund and you should pay him a larger fee. You are not being sold the manager's prowess.
If an active manager charges 2X or 5X the fee, but does not produce better returns (and they won't), the fee is not justified. You are being sold a pup.

Linton

Bostonerimus1 said:

Active managers all say that they can beat the market ie. everyone says they can be above average, think about that.

Many people say that in small "inefficient" markets active funds are better than index trackers, but most people now invest globally and any perceived advantage that might have been gained because of a home bias will be pretty small....if it even exists. Active funds have higher fixed costs than index trackers and so I can't see a reason to use them for the vast majority of people. Just construct your asset allocation from inexpensive trackers and don't fiddle with it. Once you've taken the active step to construct a portfolio be passive in managing it.

Having said that if you have a specific goal like income many people turn to actively managed closed end funds that target dividends and a yields. A total return approach from an index fund portfolio is probably as good, if not better, but active funds will always have the psychological advantage over a tracker portfolio because people are paying a professional for their expertise in constructing an income portfolio. The crux of "active vs passive" is whether that expertise is worth anything. But as long as you avoid the active dogs, like Woodford, you'll probably be ok, it's just knowing which active funds are going to bark. This pithy truism from Jack Bogle comes to mind "In investing, you get what you don't pay for"...ending a sentence with a proposition, Bogle wasn't an English professor, but he did see the fallacy in active management and the vested interests that profited from it.

I dont think most active equity fund managers generally talk about beating the Index.  They may use one as a benchmark but that is as far as it goes. At least in the UK, the US may be different.  What makes an active fund of interest to me is to have a well defined strategy investing in particular sections of the global market. 

I run 2 completely separate portfolios which are currently of much the same size. The objective of one is to produce steady income of around 6% of investment value by investing in a very broadly diversified set of funds with no less than 5% in any one fund. The second portfolios role is to produce inflation beating capital gains in the medium term sufficient to top up the income portfolio when necessary and cover large one-off expences, mainly holidays.

Each portfolio's objectives lead to corresponding requirements in turn leading to desired asset allocations in terms of asset class, geography, sectors etc. Meeting the allocations makes some use of active funds essential as blind use of market capitalisation based funds cannot achieve it.  The income portfolio is 100% active since passives cannot provide the desired level of income and cannot access as broad a set of underlying assets as is required.

The growth portfolio is 100% equity.  Just over 50% is passive covering US, Europe, and China.  The rest are active covering US and European Small Companies, Japan, and general EM, making 7 funds in total. 

Anyone reading this far may have noted that beating any index is not a requirement.  All that matters is that the required level of spending can be afforded without significant ongoing management or sleepless nights worrying about the future.