Even the strongest advocate of active management must concede that, as a matter of simple arithmetic, the universe of active managers will underperform the universe of passive managers. Costs matter and passive management is a much cheaper endeavor. As Morningstar discovered, in every single time period and data point tested, low-cost funds beat high-cost funds. Factor in the added tax efficiency of passive investing (much longer holding periods and far fewer transactions in general) and it is clear that active management bears a difficult burden in the race to earn the business of investors.
Size matters too. The more assets under management, the harder it will be for a money manager to outperform. This is what legendary investor Michael Steinhardt called “diseconomies of scale.” As the expression goes, “elephants can’t dance.” Accordingly, all else being equal, I will generally favor smaller money managers and those who charge lower fees. I will also favor strategies with a higher likelihood of tax efficiency (in taxable accounts), for the same general reasons.
The Value Project (2): Commit to Diversification
The Value Project (3): The Value Proposition
The Value Project (4): Emphasize Process
The Value Project (5): Other Stuff
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