Today I received an email from an advisor that continues to work with actively managed mutual fund providers to serve his clients. He sent me a document that a fund company had produced for him showing that actively managed mutual funds have consistently beaten their benchmark ETFs, and asked me what I thought. My response follows:
Thank you for thinking to send this over.
I think it’s very interesting that the active management vs. ETF/passive debate is important enough for this fund company to have made this document. I think it is even more interesting that they are pushing their advisors to sell their active funds while they are also making ETFs on the side.
But look, the thing you have to understand is that there will be funds that outperform just like there will be stocks that will outperform. I could go and find a bunch of stocks that have beaten a benchmark over the last ten years and say that it’s possible to beat the market. It's important to understand that with a mutual fund, any time you are not holding the whole benchmark there can be periods when you outperform and periods when you underperform. I could go and find a bunch of funds that have not beaten their benchmark over the last ten years just as easily as they found ones that did.
The key though, is that you or I, or even the fund managers don’t know when they will be winners or when they will be losers. You can go and say "ok, the XX was up 11% over the S&P/TSX last year, I’m going to put my client in that one". But you know as well as I do that past performance does not indicate future performance. You are betting on that fund doing well on your client’s behalf based on how well it did last year; you have no idea if it will be up or down in the future. If you don’t know what the fund will do in the future, why not just accept the market’s returns and get rid of the high MER instead of hoping that the fund happens to be up during the period that your client is invested?
Picking funds is on the same level as picking stocks in my opinion. You can say "well this manager has tons of experience and the fund has done well in the past" and so on, but that’s no better than looking at the financials of a company and saying "oh they have strong earnings, good management, and a stable dividend I will pick that one". There is simply too much information in both cases to make an accurate prediction AND your clients are paying high fees for you to place these bets... it just doesn’t sit well with me.
Original post at pwlcapital.com