Feb 23, 2009
Does passive management makes sense in all market conditions?

EFF/KRF: Active management is always a zero sum game, before fees, expenses, and trading costs, regardless of market conditions. If there are active winners, they win at the expense of active losers. And active management is always a negative sum game after costs. This is an algebraic condition, not a hypothesis. We call it equilibrium accounting.

Moreover, our research on individual mutual funds says that it's impossible to identify true winners on a reliable basis, even if one ignores the costs that active funds impose on investors. Funds that seem to be winners, based on past returns, were probably lucky rather than smart. After costs, that is in terms of returns to investors, there is no game to play; there is no evidence of managers with enough information to cover costs, other than on a purely chance basis. And there is no evidence that this depends on market conditions. If you are interested, see our paper Mutual Fund Performance.

In short, passive management and passive investing always make sense.

Eugene F. Fama
The Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business
Kenneth R. French
The Roth Family Distinguished Professor of Finance at the Tuck School of Business at Dartmouth College
This information is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Dimensional Fund Advisors and does not represent a recommendation of any particular security, strategy or investment product. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to Dimensional Fund Advisors LP.