Active vs. Passive Investing

Net flows into passively managed funds have surged in recent years, leaving active managers to pick up the crumbs. And earlier this year, none other than Warren Buffett warned of the high costs of active management and gave a qualified endorsement of indexing.

“For years and years — decades, really — the standard of comparing costs in mutual funds has been to take their total expense ratio, . . . but there are an awful lot of costs involved in mutual funds that aren’t in the expense ratio,” John C. Bogle said, when discussing his latest research.

If you didn't get around to all the reading you had intended to, here's a quick roundup of some of the articles and video clips you may have missed.

Gus Sauter, who managed Vanguard’s flagship index funds during a period of exponential growth, reflects on the merits of passive and active investing, while sharing his thoughts on financial industry innovation.

The $2 trillion question is not whether hedge funds do something valuable in the markets; it’s whether hedge funds are worth the price. Ted Seides presents three different arguments in support of hedge funds.

Although some critics grouse about them, most investors have long thought that investment management fees can best be described in one word: low. Indeed, fees are seen as so low that they are almost inconsequential when choosing an investment manager. This view, however, is a delusion.

The father of modern finance took on critics of efficient markets and issued stinging rebukes of “too big to fail” banks, pension plans, active management, and behavioral finance.

In a lecture presented in 2004, John Bogle, founder of the Vanguard Group, documented a direct and substantial relationship between management costs and mutual fund returns. Stratifying all funds by expense ratio, from lowest to highest, he reported the following 10-year average annual returns by quartile: 10.7 percent, 9.8 percent, 9.5 percent, and 7.7 percent. A presumption of market rationality would lead one to expect that investors demanded reduced fees in response to this negative correlation. According to Bogle, however, the average equity fund’s expense ratio was on a long-run rise, which represented a gain for mutual fund operators but an aggregate loss for the consumers they served.

Exchange-traded funds (ETFs), which offer investors diversification and liquidity at a low cost, have exploded in popularity in recent years and now represent a $1 trillion global market. Morningstar estimates that ETFs now account for at least a third… READ MORE ›

Do your investment decisions involve emotions?

You may be inclined to think not, but according to Professor David Tuckett, a psychoanalyst at University College London, emotions are part and parcel of investment decisions.

A researcher in emotional finance,… READ MORE ›