Fama: Active Management a Bad Bet

Nobel Prize winner cites lower costs and questions about active manager skill as reasons to stick with index funds.

Adam Zoll 16.10.2014
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Active fund management is a zero-sum game in which luck and skill are virtually indistinguishable, says Nobel Prize-winning economist Eugene Fama.

Fama, a University of Chicago finance professor and a co-winner of the Nobel Prize in economics last year for his efficient markets hypothesis, spoke to an audience of financial advisors and institutional investors on 18 September 2014 at the Morningstar ETF Conference in Chicago.

He said that passively managed investments such as index-based mutual funds and ETFs merely reflect the market. Therefore, in order for some active managers to beat the market, other active managers must lag it. Why they beat or lag the market is another matter, Fama said. “The good ones might be good, or they might be lucky. The bad ones might be bad or might be unlucky. You can’t really tell the difference,” he said.

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Adam Zoll  Adam Zoll is an assistant site editor with Morningstar.com

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