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Shooting the Messenger What's behind active funds underperforming their benchmarks?
BY Craig Lazzara

”Active investing has been subjected to increasing abuse, particularly by those whose opinions are driven by the persistent accumulation of hard data and logical arguments.”

- Charles D. Ellis


Index funds, which did not exist 50 years ago, now play a prominent role in global financial markets. The growth of indexing was driven by the failure of active managers, in aggregate, to outperform passive benchmarks. This failure is not a new development—it was reported as long ago as the 1930s. The rise of passive management was the consequence of active performance shortfalls.

These shortfalls can be attributed to four sources:

• Cost

• The professionalization of investment management

• Market efficiency

• The skewness of stock returns

We estimate that 20% of U.S. equity assets, amounting to approximately USD 5 trillion, was invested in index trackers as of Dec. 30, 2016. This commitment to passive management could save asset owners more than USD 20 billion annually.

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