"Worse than a casino": why a top active fund manager recommends index funds instead
- TEBI
- Oct 5
- 10 min read
Stephen Yiu's Blue Whale Growth fund is one of the best performers in recent years. It returned 101% over three years — triple the peer average. You would think, then, that Yiu had every reason to celebrate active management. Instead, Yiu has told investors their odds of success are "worse than going to a casino." His recommendation? Buy a low-cost tracker instead. When even winning fund managers admit the game is rigged, and academic research reveals they keep their own money in index funds, it's time to examine why a broken industry still exists — and how to escape it.
Imagine one of Britain's best-known active fund managers standing before investors with an impossible confession. His fund returned 101% over three years — nearly triple the peer average. He's top quartile across every timeframe. The Blue Whale Growth fund is precisely the kind of star vehicle the industry holds up as proof that stock picking works.
Yet Stephen Yiu is telling investors: "Your success rate is worse than going to a casino."
His recommendation? Buy a low-cost index tracker instead.
This isn't academic theory. This is a winner telling you not to play. And when successful active managers are raising the white flag — keeping their own money in index funds whilst professionally managing active portfolios — something fundamental has shifted.
You're not imagining it
If you've felt nagging doubt about active fund management, your instinct is sound. You've paid 0.75% to 1% annually for professional expertise. Yet your portfolio lags the market.
The industry deploys well-rehearsed scripts. "Past performance doesn't indicate future results" (ignore our failures). "We add value in downturns" (the perpetual bear market excuse). "Index funds can't do ESG properly" (ethics smokescreen). "We provide essential price discovery" (public service claim).
Meanwhile, advisers recommend active funds. Platforms promote star managers. The media celebrates stock-picking heroes. Yet returns don't materialise. The performance gap widens.
You're not missing anything. The game is rigged. And the dealers are admitting it.
The insider testimony: what they say vs what they do
The public confessions
Yiu's casino warning isn't isolated. It's part of a pattern from those who've succeeded at active management.
"The reality is that in the active management space most funds are performing less well than a world stock market tracker," Yiu told The Times. "The numbers show that 85% of global funds underperformed the MSCI World index in 2024 so only 15% did better than a tracker.
Your success rate is worse than going to a casino."
On a roulette wheel, you have 47.4% odds when betting red or black. Active fund investing offers 15%. The casino genuinely beats active management.
Warren Buffett, arguably history's most celebrated stock picker, has spent decades telling non-professional investors to ignore his example. His recommendation: "the best way to own common stock is through an index fund that charges minimal fees." In his 2013 shareholder letter, Buffett revealed that 90% of his wife's inheritance should go into a low-cost S&P 500 index fund, with just 10% in short-term government bonds.
This isn't casual suggestion. It's a wealth protection blueprint from someone who built a trillion-dollar conglomerate through concentrated stock picking — and he's saying his own family shouldn't follow his approach.
Terry Smith, whose Fundsmith is one of Europe's most successful active funds, diagnoses the problem precisely. Passive investing has grown because "investors find it difficult to find good active managers." The mathematics is unforgiving: since the market index represents the weighted average of all participants, and active funds deduct costs whilst the index doesn't, "more than half of active managers will underperform the index at any time" after expenses.
Bill Miller, former CIO of Legg Mason Capital Management, frames it starkly: only proceed with active management if you can "look inside yourself and know that you have a special gift."
These aren't peripheral voices. These are industry titans telling you to walk away.
The private behaviour
The confessions become devastating when you examine what these professionals do with their own money. Academic research by Millo, Spence and Valentine (2023) reveals a stunning disconnect between public advocacy and private action.
Some active fund managers keep all their personal wealth in index funds. One sell-side equity analyst stated simply: "All my own money is in index funds."
When asked why he bothers coming to work if active asset management is futile, his response was revealing: "I get out of bed each morning thinking I have an incredibly interesting job... I almost liken it to being a sports commentator, like we are up in the field commentating on the companies that are battling each other out in the marketplace."
He admits he's entertainment, not alpha generation. Commentating, not playing. Certainly not winning.
The numbers that prove them right
The S&P Indices Versus Active (SPIVA) scorecards track active fund performance against passive benchmarks. The results are damning.
For US domestic large-cap mutual funds, failure rates compound relentlessly:
After 1 year: 57% underperform
After 5 years: 77.3% underperform
After 10 years: 84.7% underperform
After 20 years: 91.8% underperform
Time is the enemy. The longer you hold, the more certain your underperformance. This isn't cyclical. It's mathematical certainty driven by structural cost.
Yiu's 15% success rate collapses to 8.2% over 20 years. The roulette wheel's 47.4% odds look attractive by comparison — and don't deteriorate with time.
The insiders are telling the truth. The question is: why does a demonstrably broken system still exist?
Why does a broken industry still exist?
The mathematical trap
A typical index fund charges 0.05% annually. Blue Whale charges 0.75%. Many active funds charge 1% or more. This isn't a minor headwind — it's a mathematical guarantee of failure for the majority.
An active manager charging 1% must beat the market by more than one percentage point every year, after costs, just to break even with the tracker. For decades. Whilst maintaining the same gross outperformance.
The compound destruction is brutal. Consider £100,000 invested for 30 years at a 7% gross market return:
Index fund (0.05% fee): approximately £726,000
Active fund (1% fee, matching market gross return): approximately £574,000
Difference: £152,000 lost to fees alone
That assumes the active fund matches the market before fees — which 85% don't annually, and 92% fail to do over two decades.
Even Yiu's stellar three-year performance operates within this trap. His 0.75% fee is 15 times the cost of passive. The critical question isn't whether he's beaten the market recently — it's whether he'll sustain this for 20 years. SPIVA data says 91.8% won't.
Buffett states the logic plainly: when trillions are managed by professionals charging high fees, active returns "will be diminished by a far greater percentage than will their inactive brethren." The passive group — the "know-nothings" — must win.
Cost isn't a factor in the equation. It is the equation.
The survivorship illusion
Yiu represents the visible winners. But what about the invisible graveyard?
Failed active funds don't stick around for analysis. They quietly merge into other funds. Performance records vanish. Managers move firms or exit the industry. The graveyard is systematically hidden.
This creates a dangerous selection effect. We interview successful managers. We read profiles of strong track records. We don't interview the 85% who failed because many no longer manage money. The visible universe consists disproportionately of survivors, creating a systematic illusion that skill is common.
SPIVA captures what marketing material conceals. Unlike fund company tables — showing only surviving funds — SPIVA tracks all funds including those that disappeared. That 91.8% failure rate includes the graveyard. It's the real picture, not the airbrushed version.
Investors face an impossible inference problem. A strong three-year track record suggests skill. But with hundreds of active managers, some will beat the index for three years by pure chance. Distinguishing skill from luck requires 15 to 20 years of data — by which time you've paid tens of thousands in unnecessary fees.
The winner's circle constantly churns. Yesterday's stars become tomorrow's casualties. And investors pay for every rotation.
The epistemic opportunism
If the evidence is overwhelming, why does the industry persist in defending active management?
Millo, Spence and Valentine (2023) identify "epistemic opportunism" — the industry's convoluted attempts to justify its existence despite overwhelming evidence of failure. Rather than adapting to reality, the active investment community engages in defensive boundary work to maintain its mythology.
Active managers claim they'll prove their worth in bear markets — yet when COVID-19 crashed global markets in 2020, almost half of UK equity funds still underperformed. They argue ESG investing requires active management — yet passive providers now run substantial engagement teams. They position themselves as essential for price discovery — yet offer no evidence markets would fail without them. As Millo et al. observe, these defensive strategies "can actively thwart learning and frustrate innovation". The industry has become a community of practice whose "habits, routines and ways of knowing can be difficult to shift, even when faced with overwhelming evidence that what they are doing doesn't work most of the time."
This explains the disconnect between private belief and public advocacy. Fund managers know indexing works — they use it themselves. But their professional identity, their firms' business models, and career trajectories depend on maintaining the mythology. So they construct ever more elaborate justifications for a demonstrably inferior approach.
It's not stupidity. It's structural incentive misalignment masquerading as expertise.
The behaviour trap
Yiu inverts conventional wisdom about active versus passive investing:
"The way trackers work, it is way more intelligent than the label on the tin or how most people understand them: because they track the index, which rebalances every day, trackers are effectively buying winners and selling losers on a daily basis. Active managers can become stubborn and not change their investment approach but the tracker doesn't do that — it embraces meritocracy."
The traditional narrative: active is thoughtful and adaptive, passive is mindless and robotic. The reality is inverted. Active managers become emotionally attached to failing positions. Ego prevents admitting mistakes. Stubbornness masquerades as conviction.
Index trackers operate without ego. They automatically rebalance, mechanically enforcing a "buy winners, sell losers" discipline no human can match. What looks like mindless replication is bias-free execution.
Buffett makes the same point about investor behaviour. Passive investing protects investors from attempts to "time market movements," engage in "active trading," or pay "high and unnecessary fees" — behaviours that "can destroy the decent returns that a life-long owner of equities would otherwise enjoy."
The irony: the "dumb money" strategy is actually the smart psychology strategy. It removes human weakness from the equation.
Do what the winners do
The consensus among those who've beaten the market is uniform: most investors should index.
Buffett's 90/10 blueprint provides the template. Put 90% in a low-cost S&P 500 index fund, 10% in short-term government bonds. Nothing exotic. No stock picking. No market timing. No active fund fees.
This works because it captures market returns, minimises costs, enforces discipline, and diversifies broadly.
Terry Smith's cost axiom validates the approach from first principles. Since the market index represents the weighted average and active funds deduct costs, mathematics dictates most active managers will fail. Not might. Will. Arithmetic, not opinion.
Bill Miller's self-awareness test provides the framework: only proceed with active management if you honestly possess rare, exceptional investment talent. If you can't truthfully claim a "special gift" — and statistical evidence suggests you shouldn't — indexing is rational.
Even Yiu, whilst believing he belongs in that exceptional 15%, recommends trackers: "Unless you have spent the time and have experience with equities, which is very difficult when you are busy with your day-to-day life, then you should just go into a tracker. It's the best starting point and you would outperform the majority of active managers."
For 80% to 100% of your portfolio: buy a low-cost global tracker with fees under 0.10%, hold for decades, ignore the noise.
Yiu suggests a 20% satellite allocation for those wanting additional exposure: "Keep your tracker, you have 1,500 odd stocks, and then if you want to get additional value then pick an active fund or a stock that will be complimentary to your portfolio."
But recognise this 20% for what it is: speculation, not investment. The 80% tracker core builds wealth. The satellite is entertainment — like that analyst commentating on the match.
Your escape plan
If you're currently in active funds, here's how to extract yourself.
Calculate the damage. Take your active fund fees (usually 0.75% to 1%), multiply by your portfolio value, then project the compound cost over 30 years. Make the wealth destruction visible. For most investors, this runs to six figures.
Choose your tracker. UK investors have a number of excellent low-cost options. For example:
Vanguard FTSE Global All Cap Index Fund (0.23% OCF)
HSBC FTSE All-World Index Fund (0.13% OCF)
Fidelity Index World Fund (0.12% OCF)
The fee differences are minimal. What matters is staying well under 0.25%.
Switch tax-efficiently. Inside ISAs and SIPPs, switch directly with no tax consequences. In taxable accounts, consider capital gains implications. If tax is a concern, use new contributions to gradually build your tracker position whilst letting active holdings run off.
Automate and forget. Set up a monthly direct debit. Turn off performance notifications. Delete investing apps that encourage daily checking. Review annually at most. The less you interfere, the better your returns.
Inoculate yourself against backsliding. The active industry will attempt to win you back. "This new manager is different" (they're not). "AI and thematic funds are the future" (expensive narratives in new packaging). "You're missing out on the hot sector" (FOMO exploitation).
When tempted, remember Yiu's casino warning. Remember the 91.8% failure rate. Remember that successful active managers keep their own money in index funds.
The house always wins. Unless you refuse to play.
The insider's final word
When a fund manager who's tripled peer returns tells you the odds are worse than a casino, believe him. When Buffett puts 90% of his family's wealth in an index tracker, follow that blueprint. When academic research reveals active managers won't invest in their own funds, take the hint.
Active management survives not on results but on hope. Hope that you'll pick the winner. Hope that this time will be different. Hope that past performance might indicate future returns.
The mathematical reality offers no comfort. Over 20 years, your odds of picking a winning active manager stand at 8.2%. Your odds of beating the market with a low-cost tracker sit at effectively 100%, minus the negligible fee.
This isn't ideology. It's arithmetic.
You don't need to identify the 15% of managers who'll win. You don't need a "special gift." You don't need hours analysing fund performance tables. You simply need to be rational enough to accept what even the winners are telling you.
Yiu captures it perfectly: "If you ask me today, who is my biggest competitor, it's the tracker."
Even a top active manager knows he's fighting mathematics. And mathematics always wins.
The simplest advice remains the best: buy the tracker, hold it, let compounding work, and ignore everything else. The casino is still there, lights flashing, promising riches. But now you know the odds. And knowing the odds, only a fool would play.
Resource
Millo, Y., Spence, C., & Valentine, J. J. (2023). Active fund managers and the rise of passive investing: Epistemic opportunism in financial markets. Economy and Society, 52(2), 227-249.
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