Man attacks David Ramsey for recommending actively managed funds

Active versus passive

Billionaire investor Warren Buffett has been a vocal advocate for passive investment strategies. He has previously recommended low-cost index funds for average investors and said that 90% of his wife's inheritance would be deployed in such funds when he passes.

The S&P Indices Versus Active (SPIVA) Scorecard for Canada provides a comprehensive analysis of funds. According to the SPIVA Canada Scorecard, the performance of Canadian actively managed funds has been consistently poor compared to their benchmarks over various periods.

For example, in the first half of 2023, over two-thirds of actively managed funds underperformed their benchmarks across numerous categories. Specifically, 84% of Global Equity funds, 78% of Canadian Focused Equity funds, 76% of US Equity funds and 71% of Canadian Equity funds underperformed their respective benchmarks. Broaden the timeframe and SPIVA data shows that almost 97% of actively-managed equity funds underperformed the S&P/TSX Composite (GSPTSE) — a stark reminder that most investors trying to beat the market will end up with a loss.

However, many investors believe they can spot those rare mutual funds that will outperform the index over extended timelines. Ramsey counts himself as one of them.

He conceded that index funds are "wonderful." Still, he rejected Chris's claim that an investor would earn 50% more in an index fund than actively managed funds "unless you're an absolute idiot" in picking active funds.

Chris argued that even when actively managed funds outperform index funds, the higher costs associated with active management lower your returns by 2%.

“The actively-managed mutual funds that I personally have picked have outperformed the indexes by more than 2% as a portfolio,” Ramsey responded. “Because it’s fairly easy to study mutual funds and pick [ones] that outperform. But if you're not going to study them, and you're not going to have a good advisor in your corner, then using the index funds is a great idea.”

Ramsey referred to his team's survey of wealthy individuals, which he claims is the most extensive study of millionaires. According to him, the survey revealed that most millionaires accumulated wealth without significant inheritances. Ramsey also noted that "almost all" got their wealth by investing in actively managed funds within their retirement savings vehicles (things like Registered Retirement Savings Plans and Tax-Free Savings Accounts).

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Warren Buffett himself is active

Buffett, a seasoned investor, has been actively engaging in stock and private company investments for several decades through his investment vehicle, Berkshire Hathaway. His success is evident from the fact that he purchased his first stock at the tender age of 11, a testament to the effectiveness of his direct stock investment strategy.

Ramsey says Buffett doesn’t practice what he teaches.

However, the critical argument for passive investing is based on skill and fees. Unlike Ramsey, Buffett doesn’t invest in mutual funds but buys stocks directly, circumventing the expensive fees of money managers. “As Gordon Gekko might have put it, ‘Fees never sleep.’” BuffettBuffett once said that when massive amounts of money are managed by professionals charging high fees, it is typically the managers who benefit the most, not the clients. Both large and small investors should opt for low-cost index funds.

Even a tiny 2% fee can significantly impact the amount of money an average investor accumulates over time. Buffett’s direct approach avoids this cost. However, Buffett is a professional investor with decades devoted solely to investing. His chances of beating the market are dramatically higher than those of amateur investors.

While passive investing has not yet overtaken active funds in Canada, it has been growing consistently over the past years. Since 2013, the market share of Canadian passive funds increased from 10.4% to 15.5% by 2023. (Interestingly, Americans seem much more keen than Canadians to embrace passive investing. Over the past decade, assets in US passive funds have grown by a remarkable 230%.)

— with files from Sandra MacGregor

Sources

1. SPIVA Canada Scorecard: SPIVA Canada Year-End 2023 (March 14, 2024)

2. Berkshire Hathaway: Berkshire’s Performance vs. the S&P 500 (2016)