How Active Fund Managers Can Get Their Groove Back

Bleeding assets under management, active fund managers have taken to demonizing passive funds as bad for markets and capitalism in an effort to win back investors. It isn’t working. The shift from active to passive -- which is really just a reflection of an even bigger move away from high-cost to low-cost funds -- is gaining steam, with almost $3 billion a day going into exchange-traded funds and index funds. And about 75 percent of these flows are going to products that charge 0.10 percent or less. Simply put, cheap beta is a smash hit.

So where do active funds fit in a world in which passive is the star of the show? Rather than fearmongering, they may want to consider a new role: supporting actor. The fact is, most of these newly passive investors are not going to be satisfied with buying and holding three index funds or ETFs over the long haul. The temptation to spice up the portfolio here and there to try and do a little better is too strong to ignore.