Most active funds underperform, and past winners rarely repeat
The claim
Over horizons of ten years or more, the large majority of active funds underperform their benchmark, and identifying the exceptions in advance has not been demonstrated.
Why we rate it strong
Tracked continuously across markets by S&P's SPIVA scorecards for two decades, with consistent results, and supported by academic work separating luck from skill.
S&P's SPIVAS&P's twice-yearly scorecard comparing active funds against their benchmarks, corrected for funds that closed or merged mid-period. It is the closest thing the industry has to a scoreboard it cannot pick. scorecards compare active funds to their BenchmarkThe index a fund is measured against. Choosing a flattering one is the oldest way to make an unremarkable record look good, which is why the comparison is only meaningful when the benchmark matches the fund's actual mandate. across markets and time. The consistent pattern: over one-year windows a meaningful minority of active funds win, and as the horizon extends to ten and fifteen years the share that beats the benchmark falls sharply — typically to well under a fifth in major categories. Survivorship biasMeasuring only what is left. Fund league tables that exclude closed and merged funds flatter the survivors, and the funds that disappear are disproportionately the ones that did badly. makes the raw numbers look better than reality, because funds that perform badly are closed or merged out of the sample.
Fama and French addressed the natural objection — surely some managers are genuinely skilled? They compared the actual cross-section of fund returns to what pure chance would produce. The distribution of realised returns is roughly what you would see if almost no manager had skill sufficient to cover their costs. A small group at the very top may be genuinely skilled, but they are hard to distinguish from lucky in advance and their edge tends to be roughly the size of their fee.
Persistence is the practical test, and it fails. Funds in the top QuartileOne quarter of a ranked group. Fund league tables report top-quartile performance because it sounds selective; over consecutive periods, membership of it turns out to be close to random. in one period are close to randomly distributed across quartiles in the next. Choosing last decade's winner is not a strategy; it is an expensive way to buy something after its good run.
Where this breaks down
- This is a statement about averages and about the difficulty of selection in advance, not a claim that skill does not exist.
- Less efficient corners of the market — small-cap value, some emerging and frontier markets, certain fixed income segments — show somewhat better odds for active management, though the fee hurdle remains.
- Indexing has its own concentration risk. A market-cap index is by construction most exposed to whatever has already risen most, which is a real position, not a neutral one.
Terms used on this page
The same definitions the underlined words open, written out so nothing on this page depends on a click.
- Survivorship bias
- Measuring only what is left. Fund league tables that exclude closed and merged funds flatter the survivors, and the funds that disappear are disproportionately the ones that did badly.
- Benchmark
- The index a fund is measured against. Choosing a flattering one is the oldest way to make an unremarkable record look good, which is why the comparison is only meaningful when the benchmark matches the fund's actual mandate.
- SPIVA
- S&P's twice-yearly scorecard comparing active funds against their benchmarks, corrected for funds that closed or merged mid-period. It is the closest thing the industry has to a scoreboard it cannot pick.
- Quartile
- One quarter of a ranked group. Fund league tables report top-quartile performance because it sounds selective; over consecutive periods, membership of it turns out to be close to random.
Sources
Follow these rather than taking our word for the summary.
S&P Dow Jones Indices (2024). SPIVA Scorecards
S&P Global, published semi-annually since 2002
Finding: Over 10- and 15-year horizons the large majority of active funds underperform their benchmarks across most categories and regions.
Eugene F. Fama and Kenneth R. French (2010). Luck versus Skill in the Cross-Section of Mutual Fund Returns
The Journal of Finance, 65(5), 1915-1947
Finding: The distribution of fund returns is close to what chance alone would generate; few managers show skill sufficient to cover costs.