This is probably a dumb question and I'm likely missing something obvious but here's my reasoning-- where am I going off the rails?
1) Most actively managed funds do not beat the stock market index over the long-term.
2) This implies that fund managers are performing worse than a random guess. Possibly because industries/companies that the managers think will do well appear to be attractive to many people at the same time so they result in short term gains but quickly become overvalued.
3) Therefore, if we took a total stock market index and sold the funds that active managers were purchasing, and buy the ones that they sold this collection of stocks should outperform the market on average over the long term.
Basically if (A + B)/2= C Where A is the long-term growth of the stocks chosen by managers and B is the long term growth of all other stocks and C is the long-term average of the stock market and A is consistently lower than C then that implies that B is higher.
Or is it just that managers are no better than chance and the reason that they under-perform is that the MER and transaction costs eat into their profits?