One of the smartest advocates of investing in low-cost index funds and ETFs is Ben Johnson, Director of Global ETF Research at Morningstar.
In the latest TEBI Podcast, Ben explains the Morningstar Active/ Passive Barometer, how it differs from the SPIVA scorecard run by S&P Dow Jones Indices, and what we can learn from the data it produces.
The vast majority of active managers fail to beat the appropriate benchmark over the long term. Not only that, says Ben, but the survival rates are remarkably low.
“Many that existed at the beginning of our measurement period fail to make it to the end,” he explains, “and more often than not, that can be attributable to sub-par performance.”
For Ben, the principal lesson to learn from the Barometer is that cost is the single most important factor in determining future fund performance. Active managers, he says, would do themselves, as well as their investors, a favour by simply lowering their fees.
“Active managers’ success,” he says, “first and foremost, has to do with how high they’re setting the bar for themselves. (By) the bar I mean the fees that they charge. The lower the bar, the greater the odds of success.
“What we find is that low-fee funds, across virtually every category, have higher odds of success relative to the most costly funds in the same category.”
In the podcast, Ben also expresses his concern at the labelling of investment products, particularly ETFs, and argues that the term “index” has become almost meaningless and a front for active strategies.
He explains as well why, in his view, talk of passive investing undermining the smooth running of the financial markets has been blown out of proportion.
You can listen to the podcast here:
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Calling UK-based financial advisers
I’m going to be speaking at nine separate adviser events across the UK in March. There are still a limited number of places available if you would like to come along. You’ll find all the information here.