Don’t fork out for active managers, says David Swenson

If you are paying a fund manager to actively' manage your money you are making a big mistake, says finance pioneer David Swenson.

The 58-year-old made a name for himself as one of the first major investors to use alternative assets, such as private equity and real estate, to beat the market. As head of Yale University's $20bn investment fund, he is one of America's most prominent fund managers, yet he is not averse to speaking out against the financial establishment.

"There are two sensible approaches to investing - either 100% active or 100% passive", says Swenson. And unless you are getting advice from "incredibly high-qualified professionals", you "should be 100% passive" ie invested in funds that just track the market.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Swenson's warning isn't just for retail investors. He thinks most institutional investors can't beat the market either. Speaking at a Bloomberg conference on index investing, he said that most active funds care more about fleecing customers than posting the best returns.

He singled out hedge funds, which are used by wealthy individuals or institutions, saying their fees were a "huge issue". "If you're going to engage in the game where you're charging enormous fees, you have to be in the top 5% to 10% to win on a risk-adjusted basis." Swenson himself is in this percentile, having returned 14% a year over the past two decades.

Swenson also used the conference to take a swipe at the growing practice of high-frequency trading, whereby traders use complex algorithms and computer program to gain an advantage in the market. "I've always viewed high-frequency trading as a tax on the rest of us," said Swenson. "A bunch of smart people taking advantage of order-execution rules as opposed to doing something good for the marketplace."