LETTER: Active vs passive investing
While passive funds may charge 0.5% a year in fees, active funds have higher transaction costs
Gordon Shaw’s letter on March 11 (Passive funds), which suggested that it was worth pointing out that all passive funds underperform the market indices by virtue of the imposition of management fees, refers. First of all, any business transaction involves some costs, but what really matters is the magnitude of these costs. For example, a passive fund may charge 0.5% a year in fees, but perhaps 3% in the case of an active fund, and don’t even get me started on hedge funds. Just to throw into stark relief the effect of 3% a year being charged to manage an investment over ones working life, let’s try a mind game. Compare this with the other major financial commitment that you probably make at some stage, namely the purchase of your house. Let’s say that an agent, Shylock like, physically sequesters 3% of your house each year, guess how much of your house you would be left with after forty years? Its actually, less than a third. Perhaps a bedroom, half a kitchen but not much else. That,...
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