Active vs. Passive investment management and how it explains the Records Management funding crisis.

This post is about the performance premium from active records management - I use an analog to get there, so please stick with me if this doesn't look like something for you for the first few paragraphs.

In share market funds, there are two basic types of investment management.

Active management - an investment manager actively looks at the market they're in and buys and sells shares (generally on a regular basis) to try and "beat the market" by buying and selling. When they say "market," they refer to a "market index" like Standard and Poor's 500 (S&P 500). A market index measures the performance over time of that group of shares - how much the value of the shares in that group grows.

Passive management - an organisation buys a representative sample of the market and just waits for the market to grow - they don't aim to beat the market, just get the same growth that it does. In practice, this means that they get a lot of people's money together, and they buy a representative sample of the market - every share in the S&P 500 index for instance.

Until about 50 years ago though, there wasn't really a choice. You either had an active investment manager or you did the work yourself to figure out what was going to grow.

Passive investing didn't exist.

In the 1970's, John Bogle went looking for evidence about how often active investors actually beat the market - and found that mostly they didn't. What he found was that generally, the people making money were the brokers and investment managers, not their customers who were putting up the money. Active investors just didn't realiably beat the market.

So he started Vanguard - a fund dedicated to low fees, and passive investing. And it has beaten almost all active investors over any multi-year period for the last 50 years.

SO here's the analog for records management.

20 years ago, an ordinary person didn't really have anything they could do with a file. If they kept it, eventually their office filled up and at that point they had to move out into the hall or give the file to someone else.

So the value of records teams was obvious - and not really optional if you actually wanted to be able to keep or find anything over any reasonable period of time.

Now though, you can buy an 18TB hard disk for under $1,000.

There is no practical limit to what one person can store without running out of space.

File servers are amazingly cheap.

Everyone wants to give you cloud storage with their thing.

The era of only having active records management as a choice is over.

IT are providing passive records management.

They'll give you LOTS of storage - and you can do what you want with it.

They'll even back it up.

All people have to do is manage their own records on it - which they generally do quite happily.

In the share market, there are still lots of active investors - but a lot less than there used to be. In Australia, more than 50% of the market is now passive investing - and that share has grown about 7% in the last 5 years as more and more people realise that their active managers haven't been getting them returns that are as good as the passive ones.

This is again, analogous to what's happening in records management.

We are getting less and less of the money, and more and more of it is going to IT with their passive strategy.

The lesson for us from the share market is a clear one.

The active investors who are surviving, are doing it because they can demonstrate that there is a performance premium for their services.

They'll show you their investment returns for the last 5 - 10 years, and show that they've beaten the market a large percentage of the time.

If we want to survive, we need to be demonstrating that having an active records management strategy provides a performance premium over a passive one.

So where is the evidence of this?

Where is the research?

Where is the research that we actually improve the performance of our organsiations, and are worth spending money on?

Maybe this is why we aren't getting the money we need.