Why Active Can’t Beat Indexing – It’s NOT (Just) the Fees

Recent research explains why active management dramatically increases the chance of underperformance of the benchmark index. The relative likelihood of underperformance by investors choosing active management likely is much more important than the loss to those same investors from the higher fees for active management relative to passive index investing. Oliver Renick of Bloomberg discusses the research that shows that the reason for the underperformance is largely due to the impact of “skewness”. “…a concentration of outsize gains in a minority of index members is tantamount to a death sentence for anyone who gets paid for beating a benchmark.”

April 13, 2017