NEW YORK, NY – AUGUST 11: Traders and financial professionals work the floor of the New York Stock Exchange (NYSE) ahead of the opening bell, August 11, 2017 in New York City. After a week of tension and rhetoric between the United States and North Korea, stocks were on the rise for the first time in four days. (Photo by Drew Angerer/Getty Images)

There is some evangelism around the cause of passive investment. It is not unusual to find those who still have an inkling to invest in an active fund dismissed as naïve fools, seduced by a corrupt and self-interested industry into paying high fees for terrible performance. But is this really the case? Are there still sound reasons to invest in an active fund?

The clamour around passives is loud, and mounting. A recent example in the Financial Times quoted Charles D Ellis (most recent book: “The Index Revolution: Why Investors Should Join It”: “Three points are crucial. Over 10 years, 83 per cent of active funds in the US fail to match their chosen benchmarks; 40 per cent stumble so badly that they are terminated before the 10-year period is completed and 64 per cent of funds drift away from their originally declared style of investing.”

These types of statistics are compelling. They echo a recent survey by index provider S&P Dow Jones, which found that 99 per cent of actively managed US equity funds sold in Europe have failed to beat the S&P 500 over the past 10 years, while only two in every 100 global equity funds have outperformed the S&P Global 1200 since 2006.

It is difficult to argue with those kind of statistics. They would appear to suggest that it is not possible to give a higher return by picking individual stocks using skill and judgement, and there is little point paying active asset management fees. Active fund managers are, for the most part, flailing around, getting paid enormous salaries for doing huge amounts of intellectually rigorous but completely useless work while markets dance to their own tune.

However, there are reasons why this conclusion – and the above statistics – do not give a complete picture. Firstly, it is worth noting, the worst statistics come from the US market, the largest and most liquid in the world. Lots of market participants means lots of price discovery and not a lot of opportunity for active managers to find mispriced stocks, which is the bread and butter they need to outperform an index.

The efficient market hypothesis would have it that all markets work like this. While I would not presume to take on the academics here, this has undoubtedly been brought into question over the years. Jeremy Grantham has been a long-running and vocal critic, going as far as to blame the hypothesis for the financial crisis – . The US market is highly efficient, but other markets are not, and here the statistics are different.

Research from Fund Consultants for Aberdeen found that investment trusts – which tend to be run more actively because they don’t need to manage inflows and outflows – outperform their passive equivalents 90% of the time over 10 years. The report said: “Passive outperforms active. This has become a widely accepted truth, supported by regulators, by many advisers and, increasingly, by private investors. It has become so widely accepted that it is barely interrogated. Yet research from Fund Consultants calls this assumption into doubt.”

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NEW YORK, NY – AUGUST 11: Traders and financial professionals work the floor of the New York Stock Exchange (NYSE) ahead of the opening bell, August 11, 2017 in New York City. After a week of tension and rhetoric between the United States and North Korea, stocks were on the rise for the first time in four days. (Photo by Drew Angerer/Getty Images)

There is some evangelism around the cause of passive investment. It is not unusual to find those who still have an inkling to invest in an active fund dismissed as naïve fools, seduced by a corrupt and self-interested industry into paying high fees for terrible performance. But is this really the case? Are there still sound reasons to invest in an active fund?

The clamour around passives is loud, and mounting. A recent example in the Financial Times quoted Charles D Ellis (most recent book: “The Index Revolution: Why Investors Should Join It”: “Three points are crucial. Over 10 years, 83 per cent of active funds in the US fail to match their chosen benchmarks; 40 per cent stumble so badly that they are terminated before the 10-year period is completed and 64 per cent of funds drift away from their originally declared style of investing.”

These types of statistics are compelling. They echo a recent survey by index provider S&P Dow Jones, which found that 99 per cent of actively managed US equity funds sold in Europe have failed to beat the S&P 500 over the past 10 years, while only two in every 100 global equity funds have outperformed the S&P Global 1200 since 2006.

It is difficult to argue with those kind of statistics. They would appear to suggest that it is not possible to give a higher return by picking individual stocks using skill and judgement, and there is little point paying active asset management fees. Active fund managers are, for the most part, flailing around, getting paid enormous salaries for doing huge amounts of intellectually rigorous but completely useless work while markets dance to their own tune.

However, there are reasons why this conclusion – and the above statistics – do not give a complete picture. Firstly, it is worth noting, the worst statistics come from the US market, the largest and most liquid in the world. Lots of market participants means lots of price discovery and not a lot of opportunity for active managers to find mispriced stocks, which is the bread and butter they need to outperform an index.

The efficient market hypothesis would have it that all markets work like this. While I would not presume to take on the academics here, this has undoubtedly been brought into question over the years. Jeremy Grantham has been a long-running and vocal critic, going as far as to blame the hypothesis for the financial crisis – . The US market is highly efficient, but other markets are not, and here the statistics are different.

Research from Fund Consultants for Aberdeen found that investment trusts – which tend to be run more actively because they don’t need to manage inflows and outflows – outperform their passive equivalents 90% of the time over 10 years. The report said: “Passive outperforms active. This has become a widely accepted truth, supported by regulators, by many advisers and, increasingly, by private investors. It has become so widely accepted that it is barely interrogated. Yet research from Fund Consultants calls this assumption into doubt.”

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