Active vs Passive Investing
Active funds pay managers to beat the market; passive (index) funds aim to match it for a fraction of the cost. The data on which approach wins is unusually clear — and most investors have never seen it.
What the scorecards say
S&P's long-running SPIVA Canada reports compare active funds to their benchmarks. The pattern repeats across periods and categories: over 10-year windows, the large majority of active Canadian equity funds underperform their index — frequently 80–90% of them. Some active funds do win; identifying them in advance is the part nobody has solved, because past outperformance shows little persistence.
Why beating the market is so hard
- Arithmetic. All investors collectively earn the market return; after costs, the average active dollar must trail the average passive dollar (Sharpe's "Arithmetic of Active Management").
- Fees compound against you. A 2% MER means the manager must beat the index by 2 points every year just to tie.
- Markets are crowded with professionals competing away easy mispricings.
The honest case for active
Less-efficient corners (small caps, some bond niches), genuine downside-management mandates, and — practically — an advisor relationship that keeps you invested through crashes can be worth more than the fee drag, if the fee is honest. Behaviour beats basis points.
A sane default
Build the core with broad, low-cost index funds or asset-allocation products; add active satellites only where you have a specific, articulable reason. And never pay active prices for closet indexing — compare the fund's holdings to its benchmark before paying 2% for it.