On Investment Selection:
Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs…. The best way to measure a manager’s performance is to compare his or her return with that of a comparable passive alternative.”¹
Nobel laureate Dr. William F. Sharpe

Past performance is not helpful in predicting future returns. The two variables that do the best job in predicting future performance [of mutual funds] are expense ratios and turnover.² – Burton G. Malkiel

Your chances of selecting the top-performing funds of the future on the basis of their returns in the past are about as high as the odds that Bigfoot and the Abominable Snowman will both show up in pink ballet slippers at your next cocktail party. In other words, your chances are not zero—but they’re pretty close.³
Benjamin Graham

Most fund buyers look at past performance first, then at the manager’s reputation, then at the riskiness of the fund, and finally (if ever) at the fund’s expenses.8 The intelligent investor looks at those same things—but in the opposite order. Since a fund’s expenses are far more predictable than its future risk or return, you should make them your first filter.⁴
Benjamin Graham

Financial scholars have been studying mutual-fund performance for at least a half century, and they are virtually unanimous on several points: the average fund does not pick stocks well enough to overcome its costs of researching and trading them; the higher a fund’s expenses, the lower its returns; the more frequently a fund trades its stocks, the less it tends to earn; highly volatile funds, which bounce up and down more than average, are likely to stay volatile; funds with high past returns are unlikely to remain winners for long.⁵
Benjamin Graham

On Cost-Efficiency and Overall Prudence:
So, the incremental fees for an actively managed mutual fund relative to its incremental returns should always be compared to the fees for a comparable index fund relative to its returns. When you do this, you’ll quickly see that that the incremental fees for active management are really, really high—on average, over 100% of incremental returns!⁶
Charles D. Ellis

Mutual funds appear to provide investment services for relatively low fees because they bundle passive and active fund management together in a way that understates the true cost of active management. In particular, funs engaging in closet or shadow indexing charge their investors for active management while providing them with little more than an indexed investment. Even the average mutual fund, which ostensibly provides only active management, will have over 90% of the variance in its returns explained by its benchmark index.⁷
Ross Miller

a large number of funds that purport to offer active management and charge fees accordingly, in fact persistently hold portfolios that substantially overlap with market indices….Investors in a closet index fund are harmed by for fees for active management that they do not receive or receive only partially….Such funds  are not just poor investments; they promise investors a service that they fail to provide.⁸
Martijn Cremers

Active vs. Passive Investing:
“Prudent investment principles …allow the use of more active management strategies by trustees, “if the costs are ‘justified’ in comparison to ‘realistically evaluated return expectations’. ⁹
Restatement (Third) of Trusts, Section 90, cmt. h(2)

99% of actively managed funds do not beat their index fund alternatives over the long term net of fees.¹⁰
Laurent Barras, Olivier Scaillet and Russ Wermers

Increasing numbers of clients will realize that in toe-to-toe competition versus near–equal competitors, most active managers will not and cannot recover the costs and fees they charge.¹¹
Charles D. Ellis

[T]here is strong evidence that the vast majority of active managers are unable to produce excess returns that cover their costs.¹²
Philip Meyer-Braun,

[T]he investment costs of expense ratios, transaction costs and load fees all have a direct, negative impact on performance….[The study’s findings] suggest that mutual funds, on average, do not recoup their investment costs through higher returns.¹³
Mark Carhart

Investment Litigation Risk Management:
When market index funds have become available in sufficient variety and their experience bears out their prospects, courts may one day conclude that it is imprudent for trustees to fail to use such accounts. Their advantages seem decisive: at any given risk/return level, diversification is maximized and investment costs minimized. A trustee who declines to procure such advantage for the beneficiaries of his trust may in the future find his conduct difficult to justify.¹⁴
John H. Langbein and Richard A. Posner

Note: This is exactly what the First Circuit Court of Appeals mentioned in its Brotherston v. Putnam Investments, LLC decision. As legendary ERISA attorney Fred Reish likes to say, “forewarned is forearmed.

And the one many judges love to cite:
“[A] pure heart and an empty head are not enough” to defeat a breach of fiduciary duty claim.¹⁵

Notes
1. William F. Sharpe, “The Arithmetic of Active Investing,” available online at https://web.stanford.edu/~wfsharpe/art/active/active.htm.
2. Burton G. Malkiel, “A Random Walk Down Wall Street,” 11th Ed., (W.W. Norton & Co., 2016), 460.
3. https://www.goodreads.com/author/quotes/755.Benjamin_Graham?page=4
4. https://www.goodreads.com/author/quotes/755.Benjamin_Graham?page=5
5. https://www.goodreads.com/author/quotes/755.Benjamin_Graham?page=3
6. Charles D. Ellis, “Letter to the Grandkids: 12 Essential Investing Guidelines,” available online at https://www.forbes.com/sites/investor/2014/03/13/letter-to-the-grandkids-12-essential-investing-guidelines/#cd420613736c
7. Ross Miller, “Evaluating the True Cost of Active Management by Mutual Funds,” Journal of Investment Management, Vol. 5, No. 1, 29-4.
8. Martijn Cremers and Quinn Curtis, Do Mutual Fund Investors Get What they Pay For?:The Legal Consequences of Closet Index Funds, https://papers.ssrn.com/sol/papers.cfm?abstract_id=2695133.
9. Restatement (Third) Trusts, Section 90, cmt. h(2) (American Law Institute, 2007. All rights reserved.)
10. Laurent Barras, Olivier Scaillet and Russ Wermers, False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas, 65 J. FINANCE 179, 181 (2010).
11. Charles D. Ellis, The Death of Active Investing, Financial Times, January 20, 2017, available online at https://www.ft.com/content/6b2d5490-d9bb-11e6-944b-eb37a6aa8e.
12. Philip Meyer-Braun, Mutual Fund Performance Through a Five-Factor Lens, Dimensional Fund Advisors, L.P., August 2016.
13. Mark Carhart, On Persistence in Mutual Fund Performance,  Journal of Finance, Vol. 52, No. 1, 57-8 (1997).
14. John H. Langbein and Richard A. Posner, Measuring the True Cost of Active Management by Mutual Funds, Journal of Investment Management, Vol 5, No. 1, First Quarter 2007 http://digitalcommons.law.yale.edu/fss_papers/49.
15. Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir. 1983).

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