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Home Investing

Two Strikes against Active Management

by Ram Balakrishnan
December 5, 2007
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Investing Intelligently recently wrote a nice rebuttal of Rob Carrick’s article on how actively managed funds handily beat the index during the last bear market. You may not be able to count on mutual funds outperforming the index in the next bear market though. David Breman notes in today’s Financial Post that Canadian equity funds fell 6.1% in the month of November barely beating the TSX Composite Index, which slid 6.2%:

Fans of actively managed funds will often defend the hefty management fees associated with mutual funds by saying that active management shines when markets turn volatile. That is when money-management expertise can steer dollars away from obviously overvalued, over-hyped sectors and into areas that should perform well.

The November results, however, show that this is easier said than done.

Also, Jon Chevreau confesses in a recent blog post on how he gave up on mutual funds after publishing a “Smart Funds Guide” for many years:

I stopped writing the guides after the 2000 edition because I kept asking my fund analyst coauthor how it was that the one hundred “Smart Funds” we chose often were beaten by the index by which they were measured. Each “Smart Fund” included graphics of the performance of the fund versus the index. After awhile, I started to wonder if some of the best funds didn’t beat the index, what did this say about the “Dumb Funds?”

So, why do investors continue to flock to mutual funds? Is it as John Bogle likes to say a triumph of hope over experience or is the general public unaware of the corrosive effect that high fees have on performance?

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