Figure 1 : Total AuM of Active and Passive Mutual Funds in the United States ( 2000 – 2022 )
Source : Statista . ( June 13 , 2023 ). https :// www . statista . com / statistics / 1263822 / active-passive-mutual-funds-total-net-assets-usa /
from 2000 – 2022 . The percentage allocated to index funds rose from 7.5 % in 2000 to 27.9 % in 2022 , but active funds still account for most assets .
The problem with this picture is that the ability of active managers to outperform comparable indexes diminishes as AuM increases . This is because the price of securities is affected by the demand for them . Even if managers identify mispriced securities , purchasing them in large amounts pushes the price back to fair value . The larger the fund , the harder it becomes to outperform . But the opposite is true for index funds : as AuM increases , index funds spread their fixed costs across a larger asset base , thus reducing fees as a percentage of assets . Unlike actively managed funds , size is an ally of index funds .
The Future of Active Management
Sound mathematical principles and a preponderance of evidence reveals that actively managed funds outlived their utility long ago . Over the past several decades , a relatively small but growing number of institutional and individual investors have
recognized this reality and allocated an increasing percentage of their portfolios to low-cost index funds . Nevertheless , actively managed funds still dominate the market .
On May 5 , 2021 , David Swensen , the famed CIO of the Yale Investments Office , passed away . During his 36 years at the helm of the Yale University Endowment , he substantially outperformed his peers . Accomplishing this feat required him to traverse a vast minefield of investment challenges . Reflecting on his experience , he expressed his appreciation for the rarity of this accomplishment and that it was virtually impossible to replicate . Therefore , rather than advising his peers to embark on a similarly unlikely journey , he recommended that they adopt a more simple , reliable and shockingly unconventional path that would likely bring them to a similar destination . In 2012 , Swensen stated , “ You either have the passive strategy that wins the majority of the time , or you have this very active strategy that beats the market … For almost all institutions and individuals , the simple approach is best .”
Mark Higgins , CFA , CFP ® is a financial historian and experienced institutional investment advisor . His book , Investing in US Financial History ( Greenleaf Book Group , 2024 ), recounts the full financial history of the United States from 1790 to 2023 . He is a frequent contributor to Financial History magazine and a member of its editorial board .
Sources
Edwards , Tim , et . al . “ SPIVA Institutional Scorecard — Year End 2022 .” S & P Dow Jones Indices , LLC . July 12 , 2023 .
Galton , Francis . “ Vox Populi .” Nature . 75 : 450 – 451 . 1907 .
Graham , Benjamin . “ The Future of Financial Analysis .” Financial Analysts Journal . 19 , No . 3 . May / June 1963 .
Higgins , Mark J . Investing in U . S . Financial History : Understanding the Past to Forecast the Future . Austin : Greenleaf Book Group . 2024 .
Jacobson , Timothy C . From Practice to Profession : A History of the Financial Analysts Federation and the Investment Profession . Charlottesville , VA : AIMR . 1997 .
Jaffe , Chuck . “ Experts : Slow and Steady Still Wins the Race .” The Star-Ledger . February 6 , 2012 .
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