Note: This article is courtesy of Iris.xyz
By Joesph Hosler
Within the investment industry, there is an ongoing debate about the efficacies of passive and active investing.
Vanguard has been one of the more vocal participants in evaluating active managers and the consequences of stock-based investment strategies.
Academic research into the matter confirms Vanguard’s hypothesis: Most managers that claim to be active are not consistently adding value to the market return. Each year is pronounced the year that active management will win, but this is rarely the case.
Why does active management seem to be so ineffective at beating the market?
The majority of the investment community attempts to add value by selecting individual stocks. Investors weigh one company or theme more than others. Investment managers spend their time searching for inefficiencies in the valuation of individual companies in order to outperform the market. However, much like any free market, the more individuals focus on finding inefficiencies, the fewer inefficiencies there are to exploit. It therefore comes as no surprise that the significant research staff and budgets of the largest mutual fund complexes are unable to outperform a passive collection of stocks: their size and past success has resulted in an efficient market.