Change the Holy Grail of the Mutual Fund Industry

In previous blog posts, I’ve discussed the dismal performance of actively managed mutual funds. I also noted this underperformance has not gone unnoticed by investors. Actively managed funds have experienced massive outflows through September, while index funds have seen net inflows for the past eight months.

The slim chance of “winning.” But this isn’t the time for proponents of “evidence-based investing,” as I call it, also known as index-based investing or passive management, to rest on their laurels. Americans pay approximately $600 billion in fees each year to active fund managers who claim the ability to “beat the markets,” according to State Street calculations derived from Boston Consulting Group’s Global Asset Management 2014 report. To put that number into perspective, it’s a little less than the gross domestic product of Switzerland.

Noah Smith wrote in a Nov. 20 BloombergView article, called, “Why Some Money Managers Succeed by Losing,” that the majority of index funds outperform actively managed mutual funds every year, and especially over the long term. The “best of the best” fund managers are supposedly those who run hedge funds. In the aggregate, these funds have underperformed the Standard & Poor’s 500 index by 97 percentage points since the end of 2008.

Read the rest of the article at US News.

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