Why active management is really an expensive charade

Michael Johnson

I saw that editor John Kenchington recently wrote about absolute return funds, but what are they?

I ask as someone who has spent decades in the financial arena, and to this day no-one has been able to explain them to me.

Active fund management is only now, finally, being revealed for what it is: a web of meaningless terminology, pseudoscience and sales patter.

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For too long, active managers have been allowed to shelter behind their standard disclaimer concerning the long-term nature of investing. But the long term never arrives; it merely shuffles forward. There is never a day of reckoning.

In the meantime, ludicrously expensive talent is deployed in the pointless pursuit of continually trying to outperform one another.

Worse, it is a giant negative sum game in which the savers pay the price, their hard-won capital being persistently and innocuously eroded by recurring charges and fees.

Data shows us that the dominant contributor to total returns is the asset class mix, not individual stock selection.

In practice, some so-called active managers are actually ‘closet trackers’. Once their high costs are deducted, the outcome of sub-index performance is no surprise.

To misquote Sir Winston Churchill: never is so much being taken by so few from so many, and for so little in return.

Michael Johnson is research fellow at the Centre for Policy Studies