So many investors enjoy the promise of active management of their funds that passive funds, despite their lower costs, are still not preferred.
I regularly attend conferences and seminars where the leading investment managers give their thoughts. Ultimately an active manager can only guess that their strategy will work. Passive managers know it will. Essentially, in my view, that is the argument, hope versus truth. Do you want to spend more in the hope that you have chosen the right managers? Or, do you want to invest in a way that is academically proven to deliver returns?
In my experience investors prefer as steadier a ride as possible. Nobody really enjoys volatility when it means your investments are falling in value. If that is true then nobody really enjoys risk. If that is true then why invest in actively managed funds where you have the double risk of the markets and the manager. With passive funds you only have the single risk of the markets. That is an over-simplification of the risks involved (if anyone from compliance is reading this), but you get my point.
So if nobody really likes risk but you like active funds, then surely you are just investing for the thrill of the chase? This is fine as long as you know you are paying extra to go on that safari and you may never find what you are looking for. In fact you may even be looking in the wrong place. This blog on Where Investment Returns Come From sheds light on how passive investing can deliver the returns you need.
People like Charles Ellis and Eugene Fama know this. Eugene Fama won the Nobel Prize in Economics for his work in this area just recently, so he’s probably right. Charles Ellis was Chairman of the Yale Investment Committee from 1992-2008 and author of Winning the Loser’s Game, and says “Don’t confuse facts with feelings”.