A vast amount of research shows actively managed funds rarely beat the market, especially after considering their fees.
So why do some investors opt for the funds?
A new study by researchers at the University of Technology, Sydney (Australia) sheds light on that question by polling chief investment officers of pension funds and asset consultants.
Editor’s Note: 5 Reasons Stocks Will Collapse . . .
These are the reasons they uncovered.
1. Lack of knowledge.
Investors may not know the true cost, including brokerage, custody and transaction costs, of active managers. They also may be unaware of the odds of managers beating the market. Advertising and media magnify that shortcoming.
2. Other investment benefits.
Active managers can provide downside protection. Evidence does show that active managers outperform in a down market and underperform in up markets, but it's not clear how they do in more extreme market conditions.
3. Agent influences.
Most institutional investors rely on outside consultants whose revenue is associated with activity. Active management keeps their business active. One said recommending passive management was not good for business.
4. Bragging rights.
Investment officers may hope to obtain better compensation by beating competing funds. "Being primarily psychological, these perceived benefits flow to agents, not necessarily to principals," researchers noted.
5. Behavioral factors.
People are not completely rational or objective. They are plagued by confirmation bias, which prompts them to seek evidence confirming their initial belief, overconfidence and other behavioral issues. Investors think they can spot top-performing fund managers and managers believe they're smarter than the average.
Like addicts, some managers can't help themselves. One confessed: “I enjoy punting on the share-market. I know I would be much better off being passive! It’s a bit like eating McDonalds – I know it’s bad for me, but still I eat it."
Society urges action whatever the job, the research paper notes. "Indeed, because passivity is commonly seen as the epitome of indolence and irresponsibility, boards may adopt the 'common-sense' imperative that passive managers don’t do any work for the fund."
Individual investors should focus on getting the highest return for the risk you they're taking, Dan Solin, a wealth advisor with Buckingham Asset Management, advises in an article for
The Huffington Post.
"The most prudent path to achieving this goal is to invest in a globally diversified portfolio of low-management-fee index funds, in an asset allocation suitable for you."
Editor’s Note: 5 Reasons Stocks Will Collapse . . .
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