The market is not perfectly efficient Copy

The definition of an efficient market efficiency is one that accurately reflects all the available information. However, if this was true for the actual market, then no active manager should be able to outperform any other manager, because asset prices would always be 100% true.  The argument then is that as most markets are inefficient to some degree and as reflected in their pricing, this allows active managers to exploit the differences to be able to outperform the market.  However, while this the potential, the reality is mostly different because inefficiency by itself does not make it easy for an active manager to find and to effectively exploit it.  We can see this in the statistics where on average most active managers underperform the market over time.  Even where a manager does well for a period, they usually then underperform thereafter.  The trick would then be to be able to fire the performing active manager to give a mandate to a poor performing asset manager who is about to recover and do well. Even of you knew who these managers were, it would be impossible to persuade a client to bench a winner in order to appoint a loser.    

Indeed, this market-efficiency argument is more about being rewarded for being able to select successful active managers and at the right time, rather it is than making the case for active investing.   

Active asset managers have to select a subset of the assets from the same marketplace as what the index funds are holding so they are effectively enjoying performance from just a proportion of the same market.  Assuming they have selected the right subset and continue to do so consistently, itself a tall order, they also have to earn more to be able to cover their higher costs.  Passive investors take the whole market return but at a guaranteed lower cost, so on average their performance tends to be better. That remains true even if the market is inefficient although the less efficient a market is, the weaker is the case for active investing, because the opportunity to exploit the inefficiency narrows and the challenge to select the winning asset manager becomes harder.

Even if an active manager can find mispriced assets ahead of all of its competitors, this does not by itself guarantee outperformance.  A cheaper asset could become cheaper still, changes to the market because of a crisis could destroy inherent value, a manager may have to exit a successful position because of cash flow requirements.

Most successful active asset managers will go through periods of outperformance followed by periods of underperformance.   Sometimes this is linked to their active investing style that can go in or out of favour with the market; sometimes changes to people, organisation or sometimes just changes in fortune.  This means that an investor has to be able to select the successful asset manager, avoid the failing asset manager, and be able to change managers at the right time.  Doing this well and consistently is difficult and becomes harder to do as time goes on.