The Failure of Active Management

Investment Strategy

 Peter Lazaroff By: Peter Lazaroff

For the past 11 years, the S&P Indices Versus Active (SPIVA) Scorecard has been the de facto scorekeeper of the active versus passive debate, and last month they released their mid-year update. Below is a graphic of active funds that failed to beat their respective index.  As you can see, the results are pretty lopsided.

2015-10-21 SPIVA Mid-Year Scorecard

In addition to ten-year results, the SPIVA Scorecard also provides results for one, three, and five-year time periods. The results are the same regardless of time period: most active managers fail to beat their respective index.

The Winners Don’t Keep Winning

Not only do the vast majority of managers fail to beat the index, managers that outperform in the most recent period are unlikely to have persistent outperformance in the future.  The annual S&P Persistence Scorecard measures this across the mutual fund industry and the graphic below uses data from latest report on June 2015.

2015-10-07 SPIVA Persistence Scorecard

The left column breaks equity fund performance over a five-year period into quartiles.  The right column then shows how funds from the top quartile during the previous five-year period performed in the next five-year period.

As you can see, only 25% of the top performing funds remained in the top quartile over the next five-year period.  Meanwhile over half of the top performers from the previous period finished in the bottom half of performers in the next period, including 10% of past winners that failed and closed.

These most recent updates to the SPIVA Scorecard and S&P Persistence Scorecard aren’t a fluke.  The failure of active management is evident throughout the history of these reports, regardless of the year the report is released.

Active Investment Management in Down Markets

A common rebuttal I hear from other investment professionals is that active managers outperform in down markets and are a good tool for protecting against downside volatility.  This simply is not true.

We can see quite clearly in the 2008 SPIVA Scorecard that active management didn’t prevail during the last bear market.  In addition, Vanguard did a more extensive study (see pages 11-15) of bear markets dating back to 1973 and found no evidence that active management leads to outperformance in down markets.

Even if the myth of active management’s outperformance in down markets were true – and it’s very clearly not – protecting against the downside is a poor reason for choosing an active management strategy since bull markets last longer and provide disproportionately higher returns than bear markets.  In other words, you would have to be willing to accept long-term underperformance in return for short-term outperformance.


Active managers play a crucial role in setting prices in the market. The extremely high level of skill and competition among active managers strengthens our belief in the collective knowledge of financial markets, but it also means that luck plays a larger role in the relative performance of active managers.  (The paradox of skill will be a topic for us in the future.)

There will always be active managers that outperform the overall market, but it is extremely unlikely that you (or anyone else) will identify outperformers in advance and consistently pick the best active manager for each asset class.  Even more, the odds of your portfolio outperforming get progressively smaller as the number of funds in the portfolio increase (see Ferri and Benke 2013), so diversifying across multiple managers in each asset class may reduce your probably of success even further.

Unfortunately, a portfolio filled with active managers is simply paying for the illusion of control and the dream of market beating performance.

Sources and Disclosures

S&P Indices Versus Active (SPIVA) Scorecard

S&P Persistence Scorecard

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investing involves risk . It should not be assumed that recommendations made in the future will be profitable or will equal the performance shown. Investment returns and principal value of an investment will fluctuate and losses may occur. Diversification does not ensure a profit or guarantee against a loss.

S&P 500 Index® is widely regarded as the best single gauge of the U.S. equities market, this market-capitalization-weighted index includes a representative sample of 500 leading companies in the foremost industries of the U.S. economy and provides over 80% coverage of U.S. equities. S&P MidCap 400 Index®consists of 400 mid-sized companies and covers approximately 7% of the U.S. equities market. S&P SmallCap 600 Index® consists of 600 small-cap stocks and covers approximately 3% of the U.S. equities market. S&P Global 1200 Index captures approximately 70% of the world’s capital markets.  The index is a composite of seven headline indices, many of which are accepted leaders in their regions, covering U.S., Europe, Japan, Canada, Australia, Asia ex-Japan, and Latin America. S&P 700 Index measures the non-U.S. component of the global equity markets, covering all the regions included in the S&P Global 1200, excluding the U.S. (S&P 500). S&P/IFCI Composite Index is widely recognized as a comprehensive and reliable measure of the world’s emerging markets.  It measures the returns of stocks that are legally and practically available to foreign investors.

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Peter Lazaroff, Chief Investment Officer, first took an interest in investing when his grandmother gave him a single share of Nike stock for his 13th birthday. Today, nearly 20 years later, his investment insights are highly sought after by local and national media. More »