COVER STORY Passive vs active for the Financial Analysts Journal . In it , he says : “ The overarching reality is simple : gross returns in the financial markets minus the costs of financial intermediation equal the net returns actually delivered to investors .” My own experience is that most investors , and indeed many advisers and financial journalists , are simply unaware of the impact of compounded investment fees and charges over the long term . In his 2005 paper , Bogle stated that in the US at that time , “ 50 % or more of the real return on stocks can be consumed by costs ”. In the UK , where the cost of investing is higher , the effect of charges can typically reduce your potential returns by two-thirds . These are staggering numbers . Of course , you cannot eradicate them altogether , but cost is the one factor you can control . Keep it to a minimum and you ’ ll end up with bigger returns than most of your peers .
The evidence against active We ’ ve looked at the mathematical basis for avoiding active funds . But what about the evidence that active management really is a loser ’ s game in practice ?
2
– number of calendar years the IA Global sector has outperformed the MSCI World index in the past decade
There is so much data to prove the point , it ’ s hard to know where to begin . I ’ m going to cite three sources . The first is the
SPIVA Scorecard run by S & P Dow Jones Indices , which compares actively managed funds around the world against their benchmarks on a semi-annual basis . It consistently shows that :
● The majority of funds underperform most of the time
● Any outperformance tends to be short-lived
● A fund ’ s performance generally deteriorates over time
● Active managers consistently fail to take advantage of periods of market volatility
The second source is the
Active / Passive Barometer run by Morningstar . It surveys 30,000 funds , bundled up into categories to make comparisons fair and easy . Of the
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