The Layers of Active Investment Selection

When an investor chooses an actively managed fund, they are not just selecting the fund itself but also engaging in a complex chain of decision-making. They must rely on the fund manager to pick stocks, the investment firm to pick the manager, and potentially a wealth manager or financial adviser to pick the investment firm. This chain of delegation creates multiple layers of selection risk, each adding its own element of uncertainty.

At Fowler Drew, we argue that this process is inherently flawed and adds unnecessary complexity and cost. Instead of trying to pick the best picker, a more effective strategy is to remove the need for picking altogether.

The Fundamental Problem with Active Management

Active management is based on the belief that skilled stock selection can consistently outperform the market. However, research shows that this belief is largely unfounded. Most active fund managers fail to consistently beat their benchmarks, and those that do often struggle to maintain their success over time.

A key issue is the selection problem itself. When an investor selects an active fund, they must first identify a fund manager with a strong track record. But past performance is not necessarily indicative of future success. Even professional fund selectors—such as wealth managers, financial advisers, and institutional consultants—frequently make poor choices. Many actively managed funds are marketed based on historical outperformance, yet their future performance is highly uncertain.

The problem is compounded by manager turnover. If a fund is successful, it often attracts more assets, changing its investment dynamics. Alternatively, the original fund manager may leave, forcing investors to decide whether to stay or switch funds. This constant need for re-selection makes it difficult to maintain long-term confidence in any one active fund.

The Additional Layer of Wealth Managers and Advisers

Many investors rely on financial advisers or wealth managers to pick the funds for them. This creates yet another level of selection risk. The adviser must:

• Decide which fund management firms to trust
• Choose which individual funds to include in a portfolio
• Monitor and periodically review fund performance

This adds a further layer of cost and complexity without necessarily improving outcomes. The more layers there are in the selection process, the greater the likelihood that poor decision-making will creep in at some stage.

The Costs of Active Selection

Active funds are more expensive than passive funds due to higher management fees, trading costs, and marketing expenses. When investors pay these higher fees, they are essentially betting that the chosen fund manager will outperform enough to cover these costs. However, once fees are accounted for, most actively managed funds fail to deliver sufficient excess returns to justify their costs.

On top of fund fees, investors also pay fees to financial advisers or wealth managers who select these funds for them. These additional costs compound over time, significantly eroding long-term returns. At Fowler Drew, we believe that reducing unnecessary costs is one of the most effective ways to improve investment outcomes.

A Simpler and More Reliable Approach

Rather than engaging in the endless cycle of picking managers, picking funds, and monitoring performance, investors can eliminate the selection problem entirely. The passive investment approach avoids the need for manager selection by simply tracking market returns at low cost.

Instead of trying to beat the market through stock picking, we focus on risk-adjusted asset allocation. This means designing portfolios that match an investor’s time horizons and risk tolerance, ensuring outcomes are met with greater certainty. The evidence overwhelmingly supports this approach: broad market exposure delivers reliable long-term returns without the risks and costs associated with active selection.

2025 Update: The Decline of Active Management in the UK

Over the past few years, active management has continued to lose ground to passive strategies. The shift has been driven by increasing regulatory scrutiny, greater transparency of fund costs, and consistent underperformance of active funds relative to passive alternatives. Investors are increasingly recognising that attempting to “pick the right picker” is a losing game.

Large institutional investors, including pension funds and sovereign wealth funds, have moved significant portions of their portfolios into passive investments. Retail investors are following suit, with UK-based passive fund inflows outpacing active fund inflows for several consecutive years.

At Fowler Drew, we remain committed to an evidence-based approach that prioritises low-cost, goal-based investing over unnecessary complexity. Instead of asking clients to bet on stock pickers, we provide a clear, predictable framework for long-term wealth planning. The result is an investment strategy that is cheaper, more transparent, and far more likely to succeed.

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