Cover story
2 / 3
[ PASSIVE INVESTING ]
Robin Powell of The Evidence-Based Investor
debunks some of the biggest myths about
passive investing
Blown out
of the water
I
t is difficult to get a man to
understand something,”
the American author Upton
Sinclair once remarked, “when
his salary depends upon his not
understanding it”. That quotation
often comes to mind when I read
the stories the industry PR machine
keeps churning out about the
“dangers” of passive investing.
Let’s start with a disclosure. I’m
not a fan of active management.
I’m a journalist and five years ago I
was asked to make a documentary
about the merits of passive investing.
What I discovered from the weeks
of research I carried out and
the interviews I conducted with
academics, including Nobel Prize
winners, astounded me.
There’s more than 50 years of
peer-reviewed academic research to
support eschewing actively managed
funds in favour of low-cost index
funds, and yet the vast majority of
investors around the world either
FE TRUSTNET
continue to ignore it or, more likely,
are blissfully unaware of it.
Can you pick the 1%?
As research by David Blake at Cass
Business School and others has
shown, only around 1 per cent of active
managers beat the market over the
long term on a risk- and cost-adjusted
basis, which is about what you’d expect
purely from random chance.
If I knew who tomorrow’s winners
were going to be, I would be first
in the queue. But anyone who has
studied fund performance will tell
you that distinguishing luck from skill
is extremely difficult, and picking a
Only around 1 per cent
of active managers beat
the market over the long
term on a risk- and cost-
adjusted basis
trustnet.com