Active vs Passive Funds: the Cash Drag Conundrum

We would intuitively want active managers to outperform, but it is difficult to outperform when cash is used for liquidity rather than as an allocation decision

Dan Kemp 24 March, 2017 | 12:05AM

Intuitively, all investors know the principles of buying low and selling high. Yet, we know investors tend to do the opposite of what works in investing because investment decisions are often driven by emotion. This is no different for most active managers as it is for a mum and dad in a suburban town.

Investors get excited when the market is rising and everyone else is buying. And of course, on the flip side, they panic and sell when the market is trending down. This behaviour leads to the poor outcomes identified by the ‘active manager underperformance’; growing evidence that active fund managers fail to outperform against the relevant index, as well as the ‘investor behaviour gap’; the difference between a fund’s reported return and the investor’s return.

Howard Marks, in The Most Important Thing: Uncommon Sense for the Thoughtful Investor, said:

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About Author

Dan Kemp

Dan Kemp  is Chief Investment Officer, Morningstar Investment Management EMEA

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