Writing for the Financial Times, Merryn Somerset Webb questions the value of actively managed funds in today’s economy. While the fund management industry used to be able to point to the fact that their expertise were a safe way to provide investors with long-term outperformance over the market as a whole, recent studies show that today it is almost impossible for a fund manager to maintain high performance over any stretch of time. In fact, one of the key indicators of a fund manager being in the bottom quartile over a 5 –year period is having been in the top quartile in the previous half of the same decade.
She goes on to suggest that the traditional mindset which assumes the most important factor for the success of a fund is the skill of those managing it is actually not the case. Recent research by Russel Kinnel, Director of Research at Moring Star suggests that cost – not skill – is the key indicator for a fund’s success. He found the cheapest funds to be up to here ties more likely to succeed than the priciest funds. So it seems that buying cheap will mean you have a significantly higher chance of making money than if you invest in a more expensive fund. In other words, you don’t get what you pay for!
Buying cheap passive funds and holding them long term appears to be a sound alternative for individuals. In this scenario, one still gets any benefits from good fund manager practice, without incurring the costs associated with a more expensive fund. Read the full article published by the Financial Times ‘Fund management – why you don’t always get what you pay for’
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