Since the turn of the millennium, passive funds have been increasing in popularity as the majority of active funds have failed in their quest to beat the market, making their high fees unjustifiable. Over the last ten years 83 per cent of US active funds have lagged behind their market index, while 40 per cent have had to close prematurely as performance was so bad (Financial Times, 2017). Ultimately when investing in shares, your profit comes at the expense of other investors. A share’s value is a result of market consensus, i.e. its worth as much as everyone collectively reckons its worth. You may buy a share because you think it’s future growth potential means it is currently undervalued, so you’re presuming everyone else has overlooked this. For an active fund manager, its the same, they are competing against other investors and to beat the market they must come out on top. In the “good old days” a fund manager may have used their connections or skill to acquire information not yet known by the broader market. Allowing them to act on its implications to the share’s value before it was reflected in the market price. This is becoming increasingly less possible as a faster and more sophisticated network of information becomes more available to all investors thanks to technology advancements and more regulation and researching effort. It has become harder for the active fund manager to find the edge over everyone else, as everyone is more equally equipped. Furthermore, when a broker gives you a quote for a share, a lot of calculation has gone into determining that price at that particular moment. This is otherwise known as price discovery and incorporates many factors such as supply, demand and risk. Active fund managers use to be able to exploit variances and inaccuracies in price discovery. Yet, the technology and resource behind this practice have increased greatly since and so this avenue is being closed off to them. Institutional investors are professional entities that pool money together from their members and invest it on their behalf. They can be mutual funds, ETFs, investment banks, pension funds, hedge funds, insurance companies… basically everyone except for poor little hobbyist investors like you and me. When active fund managers, who themselves are institutional investors, had their hay day back in the 60’s and 70’s, these investors only made up 5% of the investor base. Institutional investors are much better equipped with more time and resource and therefore I’m afraid tend to be better at it than us. Don’t feel bad though, trading on your iPhone during your lunch break is a bit of an unfair comparison to a global investment bank like BlackRock or Goldman Sachs. If you recall, all investors are effectively competing against each other, so it’s no surprise that institutional investors found it easy when they were up against us everyday joes. These days however institutional investor make up 95% of the investor base which means they are predominantly competing against each other, equally well equipped and expert investors, which is proving harder.