With most active fund managers failing to beat the broader market while charging high fees, Investors may be better off sticking to low-cost, index-based exchange traded funds.
While active managers may play a role in identifying which companies can efficiently put capital to use and optimize aggregate growth, Professor David Blake, director of the Pensions Institute at London’s Cass Business School, argues that most managers reap the rewards for themselves by cashing in on high management fees, reports Sophia Grene for Financial Times article.
“A typical investor would be almost 1.44 per cent a year better off by switching to a low-cost passive UK equity tracker,” Professor Blake said in the article. “The extra returns should accrue to the investor.”
According to the Investment Company Institute, actively managed equity funds charge an average 0.89% expense ratio as of 2013. In comparison, traditional beta-index ETFs have an average 0.58% expense ratio, with some charging as little as 0.04%, according to XTF data.
The extra fees in active funds have acted as salt on investors’ wounds. S&P Indices has found that ovver the long term three- and five-year horizons, most active managers fail to produce alpha. [Poor SPIVA Scorecard Highlights Appeal of Index ETFs]