Of course it’s possible for active fund managers to add value. But in practice, after costs, they very rarely do. Part of the problem, says Weston Wellington from Dimensional Fund Advisors, is there are far too many of them.

The Market Needs Active Managers – Just Far Fewer Of Them

Transcript

Hello again.

If you’re a regular viewer of Sensible Investing, you’ll know we don’t recommend using actively managed funds.

Some say we overstate our case, that we somehow have it in for active managers. In fact neither of those is true.

In a recent interview he gave us, Weston Wellington from Dimensional Fund Advisors explained how there’s no contradiction in having the utmost respect for active managers, while at the same time advising clients to avoid them.

Weston Wellington says: “It is very, very difficult to distinguish luck from skill. I’ll put another way, it’s very easy to persuade ourselves that we can identify great performing stocks or great performing money managers. If it were the case that it were so easy to identity terrific money managers we ought to be able to do it. But in study after study after study we just don’t find that evidence. I think we ought to emphasize when we are making these statements, this is not a suggestion that active money managers are someway incompetent or greedy or they are looking at the wrong things. If anything, it’s a vote of confidence, saying there were so many talented clever, hardworking money mangers out there, all flipping through the thousands pages of corporate reports and information, all that competition serves to drive prices quickly enough to their fair value that it eliminates the easy opportunities for anybody, smart or otherwise, to gain an advantage.”

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DFA: The Market Needs Active Managers - Just Far Fewer Of Them