Why Active Funds Fail and How La Côte Invest Ensures Success

According to the latest S&P SPIVA Scorecard report for midyear 2024, more than 80% of active equity and fixed income funds have underperformed their respective benchmarks over the past decade. This trend highlights the significant challenges faced by active fund managers and underscores the importance of having the right investment approach.

Costs and Fees: A Drag on Active Funds

One of the primary reasons active funds underperform is the drag caused by high fees. Active management typically requires higher costs for research, stock-picking, and market timing, leading to management fees between 1% and 2%. In contrast, passive index funds like ETFs charge significantly lower fees—often under 0.1%—leaving more of the returns in the hands of investors.

Market Efficiency and Strategy

In highly efficient markets, asset prices reflect all publicly available information. This makes it incredibly difficult for active managers to consistently outperform because they are competing in an environment where opportunities for mispricing are scarce.

The Importance of Strategy Over Survivorship Bias

The SPIVA Scorecard also accounts for survivorship bias, where underperforming funds are merged or closed, which can create an inflated impression of active fund performance. Even among surviving active funds, long-term consistency is rare, and few match the performance of passive benchmarks over time.

Short-Term Thinking vs. Long-Term Strategy

Active managers often fall into the trap of short-term thinking, attempting to time the market or chase trends to satisfy performance pressures. This approach typically results in underperformance over time. In contrast, data shows that 80% of performance in the long run is determined by the quality of the investment strategy, rather than short-term market movements.

Luck vs. Skill

Many active managers rely on periods of short-term outperformance that may be driven more by luck than by skill. Over a 10-year horizon, most active managers fail to consistently beat their benchmarks, underscoring the challenge of relying on individual manager decisions rather than a sound, systematic strategy.

The Role of Diversification

Diversification is critical to the success of any long-term investment strategy. Benchmarks like the S&P 500 or global bond indices are naturally diversified across sectors and asset classes, reducing the impact of underperformance in any single area.

Conclusion: La Côte Invest’s Investment Philosophy of Strategy-Driven, Cost-Efficient Investing

The midyear 2024 SPIVA Scorecard reaffirms the challenges faced by active managers, with over 80% underperforming their benchmarks over a 10-year period.

At La Côte Invest, we address these challenges head-on by recognizing that 80% of long-term performance is driven by the quality of the investment strategy, not by active trading or market timing. Our investment philosophy centers on building carefully tailored investment strategies based on each client’s risk profile and financial goals. Once a sound strategy is developed, we implement it primarily through passive ETFs, ensuring cost efficiency, reliable performance, and alignment with market benchmarks.

When we take active positions, it is only when our conviction is exceptionally high, and such decisions are always aligned with the broader strategy we’ve crafted for the client. By focusing on what truly matters—creating a thoughtful, diversified strategy and executing it in the most cost-effective way possible—we help our clients achieve their long-term investment objectives without the risks and inefficiencies associated with active management.