Why Is Active Management So Difficult?

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You have to feel sorry for active managers.

The first actively managed mutual fund was introduced in 1924. More than 50 years later, in 1976, John Bogle introduced the first publicly available index fund. Despite their huge head start, actively managed U.S. equity funds now manage less in assets than passively managed funds. They were overtaken by the passive funds in 2018, according to Bloomberg.

In 2021, passively managed U.S. equity funds added $346 billion in new assets, while actively managed funds had $195 billion in outflows, according to Morningstar.1 In fact, since 2006 actively managed U.S. equity funds have lost assets every year (except for a slight gain 2013), while passively managed funds have experienced significant positive inflows.

This trend may be due, in part, to another problem active managers have. They have a hard time beating relevant benchmarks. Most can’t beat them for even a single year and, of those that do, few continue their winning ways for long.

According to the year-end 2021 SPIVA Scorecard research from S&P Dow Jones, here is the percentage of actively managed U.S. equity funds that underperformed the S&P 1500 Index over various time periods ending December 31, 2021. It paints a grim picture.

  • 72% for the three-year period (80% on a risk-adjusted basis)
  • 75% for the five-year period (81% on a risk-adjusted basis)
  • 86% for the ten-year period (93% on a risk-adjusted basis)
  • 90% for the twenty-year period (95% on a risk-adjusted basis)

S&P Dow Jones research has made similar findings for every type of actively managed fund compared to its relevant benchmark, year in and year out.

Not only is their performance lackluster, but the survival rate for active managers is woeful. S&P Dow Jones found that over the past 20 years, nearly 70% of domestic equity funds have been merged or liquidated out of existence.