Active and Passive investing

It is important keep in mind that it makes sense that average passive funds results are higher than those of the results of the active funds on average, as passive funds achieve the returns of the whole market but with lower costs. For instance, research done by John C. Bogle, founder of Vanguard, shows that the long term returns of the S&P 500 or of the Wilshire 5000 (better indicator of the returns of the American market as a whole, as it also include small and mid caps) have been more than 1% higher than the returns of equity funds in the United States.

It should be noted that the S&P 500 index does not include all American companies but the largest ones and the returns of American active fund managers against this index are also influenced by the difference in returns between small/mid caps and big companies. That is why during some periods American fund managers have outperformed the S&P 500 index during some periods and they have underperformed it in other periods.

A large percentage of mutual funds sold in Europe as active funds, in reality track a benchmark stock index of the geographical area in which they invest. However, these funds charge fees which many times are higher than 2% per annum, which is unacceptable. According to the report titled “Active Fund Management: International Evidence”, around 30% of mutual funds in most European countries are closet funds.

In addition to this big percentage of closet funds, on many occasions we also see conflicts of interest between asset management companies and clients, lack of defined investment policies and little discipline. Not surprisingly, we are seeing big flows of money into passive funds.

The results achieved by active investors on average are used to discredit anyone trying to achieve superior returns. However, from Vadevalor, we have been noticing that there is persistence in results from some fund managers who follow value investing principles and whose funds don’t match the composite of any indexes, these fund managers just try to invest in undervalued companies. We consider that market inefficiencies will allow a small group of disciplined investors to keep on obtaining outstanding results.

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