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. Keep your fees low, then, and you will inevitably do better than average. It is compelling logic and explains the rapid growth of index funds, which promise to track a stock market index, like the All Ordinaries Index or the S&P 500, for fees that can be as low as 0.1% per annum. They do have their shortcomings, though, especially for Australian investors. And those shortcomings have been on show the past 12 months. The All Ordinaries Accumulation index hasn't generated a return over the past year. Zero. Our Australian Shares Fund has returned 21%, and most of my cohorts are boasting returns in excess of 10%. You could call it outperformance. But when everyone is doing it, I'd call it index underperformance. The poor old All Ords has 40% of his portfolio in the highly correlated Big Four, BHP and Telstra. Read the full blog (VIEW LINK)
"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?
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.
Good point. I was referring to my cohort of smaller actively managed funds, but should have made that distinction.
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!