Fund charges, as we discovered in Part 2, compound hugely over time and can make a huge dent in your long-term investment returns. But as well as being very expensive, actively managed funds have a dismal performance record. Research shows only 1% of fund managers are able to beat the market consistently, and even those managers keep for themselves the value of any outperformance in fees.
In Part 3, Michael Johnson from the Centre for Policy Studies explains how fund managers are competing against each other in a negative-sum-game and that choosing which fund to invest in is an expensive lottery. That’s a view shared by the Nobel Prize-winning economist Eugene Fama who argues that markets are now so efficient that it’s become almost impossible to distinguish fund manager skill from pure chance.