Last week, I took a look at how the growth of index funds has led to more scrutiny of passive investments and their impacts on the market. This week, we’ll look at more evidence of the futility of high cost active management as compiled in DFA’s recently updated annual Mutual Fund Landscape report. The analysis shows that a majority of fund managers evaluated failed to deliver benchmark-beating returns after costs.
I attended a meeting in the early/mid 2000’s where Abigail Johnson, now the president and chief executive officer at Fidelity Investments, was the featured speaker. She tried to make the case that if everyone bought index mutual funds, that security prices would never change. In other words, she claimed that if index funds become too popular and investors “blindly” bought an index’s underlying holdings, that sufficient price discovery may not happen in the market.
So was Ms. Johnson right? Should the rise of index funds be a cause of concern for investors?
Costs matter. Whether you’re buying a car or selecting an investment strategy, the costs you expect to pay are likely to be an important factor in making any major financial decision.
Some of these costs are easily observed, while others are more difficult to assess. When investing, different variables need to be considered to evaluate how cost‑effective a strategy may be for a particular investor.