Today’s Wall Street Journal, among others, reported on a recent study by the Maryland Public Policy Institute arguing that the public pension funds which pay the highest fees haven’t reaped the highest investment returns. In fact, the study shows, it’s just the opposite — for the 5 years ended June 2012, the 10 states which paid the lowest fees outperformed the 10 states which paid the highest fees.
This conclusion is reminiscent of a 2010 Morningstar study of mutual fund returns, which showed that low expense ratios were strong predictors of fund performance. If fees and expenses are not predictive of returns, it follows that in the investment management world “you get what you pay for” is wrong, at least in a general sense. If you got what you paid for, expensive funds and managers would outperform cheaper funds and managers. If in fact it’s the opposite, that’s a powerful argument in favor of passive management.
None of this is news to readers of our SPIVA reports, which have demonstrated for years that most active managers underperform most of the time. Passive management is not only a bargain — more often than not, it has enhanced returns as well.