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Christopher Pavese, Chief Investment Officer of Broyhill Asset Management, via Harvest Exchange:

According to Morningstar, the average US equity manager, has underperformed the S&P 500 Index over the past one, three and five years. Given investors natural tendency to chase what’s working, and ditch what’s not, "the death of active management" is becoming a popular consensus sentiment.

Before writing off active management and jumping on the index fund bandwagon, investors would be well served to pause and reflect. Might this be a cyclical phenomenon? If so, when have we seen this in the past? And most importantly, how did it play out last time? Spoiler alert: yes, this is cyclical; yes, we have seen this in the past; no, it didn’t turn out so hot for overvalued indices overweighted in overvalued large caps.

Ed Chancellor’s Capital Account provides some historical perspective (pair with the more recent Capital Returns , and you have the two best finance books I’ve read this year). For memory-challenged-investors, the book offers a wonderful review of the decade leading up to the tech bubble, via a collection of essays from Marathon Asset Management.

Here are a few excerpts for all you closet indexers out there:

The periods over the last few years when the indices have outperformed active managers have largely been due to distortions created by the indices themselves, rather than to the alleged superiority of index investments.......................

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