"There's a great quote from Upton Sinclair, which I'm paraphrasing: it's amazing how difficult it is for a man to understand something if he's paid a small fortune not to understand it."
That is how Vanguard Founder John Bogle summarizes the debate about active vs. passive — unsurprisingly, given a long and public track record — which this issue is devoted to, while we spoke at his office in Valley Forge, Pa.
In other words, he says and has said for years, active managers are average and in general detract from the value of the investors they're meant to serve.
"When you do the math, you realize that the low cost provider will win in this business where nobody really wants to be the low cost provider. They would like to be but Mr. Johnson up in Boston is not going to give away his family's $25 billion in the management company to be a hero. On the contrary. He wants to hang onto that $25 billion tenaciously and a new entrant into the business is not going to buy a company for a billion dollars and then say we're going to mutualize it," Bogle says, referring to mutualization as revenue earned above the firm's costs that are either reinvested in the company or returned to clients in the form of lower costs. The drive for profit, Bogle believes, will continue the justification behind the excessive fees of active management.
Jack Brennan, chairman emeritus at the Vanguard Group, who spoke earlier this year at a conference in New York City, commented on the active vs. passive debate by noting that while active management is not dead by any means, high-cost active management is never going to win. Active managers, meanwhile, contend that even with indexes beating 80% of the active funds, that means approximately 1,300 active funds beat indexes. "When are the active fund shops going to step up their own defense?" questions AdvisorShares CEO Noah Hamman.
The debate rolls on with industry legend Bogle calling active management one of the great marketing gimmicks of all time in the face of active managers championing their superior skills in beating the market.
The active vs. passive debate might reflect the tendancy of human beings to fight against being "average," for better or worse.