Patrick Donovan

"It is a simple and irrefutable fact that, once you subtract their often hefty fees, the average of all actively managed funds’ returns must be less than the market return." Isn't this true only if actively managed funds are the only participants in the market? The average of all participants must equal the market return, but not a subset of the participants. Am I missing something?

Patrick Poke

While you are technically correct Patrick, in practice what Steve said would be right. With a sample size that large, the returns of active managers would likely be almost identical to market returns.

Steve Johnson

Good point. I was referring to my cohort of smaller actively managed funds, but should have made that distinction.

Patrick Poke

Great article again Steve, probably the easiest to understand and clearest criticism of index funds that I've seen to date. To me the idea of encouraging herd behaviour even further seems counter-productive to returns, and the efficient operation of the market. I guess it does create opportunities for value investors though!