When I get frustrated, as I often do, at the fund industry constantly touting the “benefits” of active funds in the media, I have to remind myself that there are people who’ve been quietly presenting the evidence that they extract value for consumers for far longer than I have.
Take Charley Ellis, for example. It was his paper, The Loser’s Game, published in 1975, that first helped to draw this issue to people’s attention. Here we are, 43 years later, with active management still the default mode of investing, and Ellis calmly continues to argue the case for index funds in the same polite, understated way.
His latest interview is with CNBC’s Elizabeth MacBride on the subject of survivorship bias — the tendency, when quoting fund performance data, to ignore all those funds that performed so badly they were quietly closed or merged with other funds.
MacBride describes Ellis’s take on it like this:
“Imagine you sent 100 bombers on a mission. Fifty crashed, and 50 dropped their payloads and returned. What if you looked at the 50 that returned, called the mission successful and then wrote a report that never mentioned the 50 lost planes?
“That’s essentially what many mutual funds and investment data providers do when they report the performance of actively managed mutual funds and ETFs.”
Here are Ellis’s views in his own words:
Massaging the data
“The way the numbers are reported in advertisements and promotional materials gives investors a false “enhanced” impression of the capabilities and performance of active managers. The poor and mediocre performers get deleted from the database as though they had never existed.”
“Individuals and institutions are getting humongously biased data. You know the old joke: doctors bury their mistakes. Mutual funds close or merge theirs.”
Active funds or index funds?
“You’ve got millions of people using (active management) for their retirement savings. But people aren’t making money. It’s all about sales for the fund companies.”
“If you as an investor would like to have a top quartile investment return over the next decade: index.”
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Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
