Market Context

Passive beats active

In 2008 Warren Buffett bet that a Passive S&P 500 Index Tracker would perform better than Actively Managed Hedge Funds over a 10 year period. And he won!

active fund managers [...] beat their average passive peers in just 2 of the 49 fund categories, according to analysis by Morningstar "

Financial Times 2019

Passive funds under-perform

Using Morningstar data, we have analyzed the performance of flagship funds managed by the biggest players in the Fund Industry. The chart below shows passive fund performance relative to the S&P 500 index. While these funds’ performance falls below the index, by varying amounts, the results are still very impressive considering they are over a 10 year period. We only show data for a few funds, but the story is pretty much the same across the board.

The Problem: Fee War

Market research strongly indicates there is a cut-throat fee war within the Fund Industry. It’s leaders (BlackRock, Vanguard, Charles Schwab, Fidelity Investments) are on record confirming this in words and actions. Indeed, some funds are even implementing negative fees.

The challenge is one of the industry’s hardest: to outperform an index. Many have tried, none have succeeded thus far.

If we could deliver 1 per cent outperformance every year that would be nirvana",

— Ron Kahn, head of research at BlackRock’s Systematic Active Equities, Financial Times.

More proof of just how hard it is to outperform an index is readily available. The fee war is a big headache for Fund Managers. They are unable to compete on merit, because they are all in the same boat: they under-perform. As a consequence, Fund Managers are forced to cut fees, or entice investors by paying them. Clearly the Fund Industry is ready for a major disruption!