If you invest money in funds, you may have heard of it: On the one hand, there are actively managed funds whose fund managers try to beat the market, and on the other hand, there are passive funds that limit themselves to replicating the market. The passive funds buy as many shares as there are shares in a target market, such as the Swiss Market Index (SMI). Their sole aim is to replicate the index as accurately as possible. ETFs and index funds are passive funds.

The active funds that beat the market are in the minority

The actively managed funds cost significantly more than their passive relatives. Can they justify the higher costs? The answer is relatively simple: No, in the long run, a large proportion of fund managers cannot achieve any more or outperformance. They may outperform the market one year, but they may be worse the next year. What remains in the long run are the higher costs, as shown in the chart below:

Distribution of actively managed funds based on their performance (with and without costs)

The area below the grey curve reflects all active funds available on the market. In the middle around the market average are the funds with an average performance (before costs). Towards the right (+) and left (-) there are fewer and fewer. This means that many funds are gathering around the average market return. Only a few funds achieve a significantly higher performance than the market average, just as few perform worse than the market average.

Deducting the cost of performance of active funds shifts the curve (red) to the left. It still looks the same. However, we can see that significantly fewer funds are now in positive territory (+ outperformance) below the red curve. The higher the costs are, the less likely it is that the actively managed fund will outperform the average market return (before costs).

DThe above is supported by various studies. And the studies don’t seem to be missing the point. The trend away from active to passive funds is clear.

Read more: Fees and Returns of 3a-Funds compared