While the trend of passive investing is on the rise, a deeper look into the world of fund management reveals a surprising truth - active fund managers are more successful than commonly believed.
The Rise of Passive Investing
A decade ago, passive funds accounted for only 19% of open-ended funds in the UK. Today, that number has surged to nearly 30%, showcasing the growing popularity of passive investing. The allure of passive funds lies in their lower costs compared to actively managed funds.
The Reality of Active Fund Performance
Contrary to popular belief, active fund managers have been able to outperform their benchmarks more frequently than expected. In the first half of 2024, only 31% of UK-focused active equity funds managed to beat the average passive fund in their sector. Despite the prevailing narrative, over the last five years, this number stands at a respectable 36%.
The Dilemma Faced by Investors
Despite the statistics indicating otherwise, the exodus of funds from active to passive management continues. Analysts at the AJ Bell investment platform revealed that a staggering £89 billion ($119 billion) has flowed out of active funds in the UK since the beginning of 2022. This trend has led to active fund managers feeling like they are becoming an endangered species in the financial ecosystem.
Debunking the Myth
One cannot help but question how spreadsheet algorithms consistently outperform highly-educated and skilled fund managers. Fund managers are known for their academic achievements, prestigious careers, and substantial incomes. So, what explains the persistent success of passive funds over actively managed ones? The answer remains elusive, creating a dichotomy in the investment landscape. As the debate between passive and active fund management continues, one thing is clear - the performance of fund managers is not as black and white as it seems.