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Rekenthaler Report

Active Management's Dilemma

How to do something different, without doing something bad?

The Math Problem
The first thing most novice investors learn is that they are best off buying index funds. That’s a fair starting point. Morningstar tracks the performance of actively managed funds against relevant indexes for 20 of the largest fund categories. In 17 of those 20 categories, the average actively run fund failed for the decade 2010-19 to keep pace with its benchmark. Of course, there were many exceptions, but the generalization is broadly correct.

The explicit problem for active management is that when it charges for its services, those costs harm its product. Paying more for an automobile, vacation, or tuition doesn’t change the nature of that car, trip, or education. In contrast, higher expense ratios directly and irreversibly reduce the performance of investments. If funds were sports cars, the steeper their price tags, the slower would be their acceleration. A Lamborghini would struggle to outpace a golf cart.

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