Fama and French have a new paper out on the ability of stock fund managers to outpredict the market. Short answer: no. In their words, 'we cannot reject the hypothesis that no fund managers have skill that enhances expected returns', even after adding back their explicit costs.
Alfred Cowels came out with a paper on stock market professional predictive ability back in 1933. His paper was titled 'Can Stock Market Forecasters Forecast?' His conclusion then: "It is doubtful". It is one of the seminal works of the Efficient Markets Hypothesis.
Active fund managers are still way more popular than passive funds. At least, fund manager commissions no longer have a 8.5% load as they did until the 1970's. Index funds really took off in the 1980's, but still only have about 20% of the market. It is interesting that after such a long, consistent documentation of the failure of mutual fund managers, most people prefer to pay extra to add the idiosyncratic risk of the fund to their equity allocation.
I think passive funds will slowly grow relative to active ones and eventually overtake them - and only then will there be a small advantage to active funds, which in equilibrium will be balanced out by the higher fees in active funds.
Most of my $ is in index ETFs, but I sometimes worry about how these funds (don't) vote my shares.
What about the Grossman-Stiglitz Paradox? Perhaps Stiglitz is an idiot, but Grossman may have been on the right track. We need both active and passive managers, it seems. After all, if we all went to passive management, an active manager *could* achieve superior returns, at least in the short-term. That might start people to move back to active management, keeping them in some sort of dynamic tension.
The problem with grossman-stiglitz is that there should be informed guys making higher than average returns on the information they 'buy'. Other than insider trading, no one has identified such informed traders. One would think professional investors are paying hte price, so that the net returns to investors should equal the return to investing in indices. That does not happen.
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