The Passive vs. Active Debate

Earlier this month, the good folks at Knowledge Wharton published an article on their website entitled 'If Index Funds Perform Better, Why Are Actively Managed Funds More Popular?', linked here --> http://knowledge.wharton.upenn.edu/article.cfm?articleid=2702

While, we at this blog, don't have a strong opinion on the passive vs. active debate, the article does go through a somewhat balanced excercise of the pros and cons of each. That said, while it touches upon this a little in the beginning of the article, I don't think they are giving enough credit to one very important reason why Active management outsells passive to the degree it does.

In this author's opinion, the real reason is the distribution system. Having spent quite a few years employed to distribute actively managed mutual funds, I can tell you first hand that the distribution machine to sell active management is huge and filled with very effective sales professionals. Despite the quantitative data put forth in the article, active management will continue to outsell passive as long as they build in distribution fees (12b-1s) to pay the distributors.....registered reps.

Either way, I think the article is a good read. Thanks Wharton.