Active Management Vs. Index-Based Investing: An Update on Performance

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April 5, 2024

S&P released their annual SPIVA (S&P Indices Vs. Active) U.S. Scorecard, measuring the performance of actively managed equity funds versus an equivalent index benchmark. Here at The Mather Group, LLC (TMG), SPIVA is one of the many studies that we use to continually evaluate our evidence-based investment strategy. The data typically shows similar outcomes on a yearly basis, and 2023 was no exception, as 60% of active U.S. Large Cap Equity funds underperformed the S&P 500.1 This tracks closely against the 64% average of funds underperforming over a 12 month basis, during the 23 years of data that S&P tracks.

percentage large cap

Over time, funds that consistently underperform have issues attracting and retaining investments, often causing funds to shut down. The surviving funds tend to be the best performers, which makes active managers appear more skilled than what they may be. However, S&P adjusts for “survivorship bias” by maintaining inactive funds in their data, causing the longer-term results to give a more pronounced performance advantage to the benchmarks. While 60% of US Large Cap funds underperformed in 2023, over 96% of US Large Cap Core funds underperformed the S&P 500 over the prior 10 years.

Another key takeaway is that underperformance of actively managed funds is prevalent across most asset classes. Looking at the table below, it becomes evident that actively managed U.S. Small Cap & International funds also underperform their benchmarks at a greater than 50% mark over a one-year period. And similar to US Large Cap funds, the odds of outperforming decrease when looking at longer timeframes.

percent of funds underperforming

A new addition to S&P’s annual report is an after-tax scorecard. This new report looks at the impact of taxes on investment returns. Overall, active funds tend to be less tax efficient. This is in large part due to higher portfolio turnover.2 As these funds turnover their portfolio holdings and realize capital gains, the gains are passed on to their investors. The higher tax-cost of active funds creates an additional hurdle in outperforming the funds’ benchmarks.

10 year underperformance rates

Taking this a step further, active funds tend to realize capital gains in both up and down markets. This is due to portfolio turnover often not being an active investment decision by the fund manager but rather a necessity driven by the need to sell positions in order to meet their investors’ liquidation requests. A fund with poor performance or in a weak market may see an increase in investors wanting to sell their fund, which could require appreciated positions to be sold. For an investor that is not looking to liquidate, this can cause increased passthrough of capital gains, leading to further underperformance on an after-tax basis. The chart below illustrates this concept and displays how active funds can have large distributions even during down markets.

capital gains percent

Another resource TMG reviews is Morningstar’s US Active/Passive Barometer, which runs a similar analysis comparing active funds to passive investment funds. Morningstar arrives at a similar conclusion; most active funds tend to underperform, and this underperformance is more prevalent when looking at longer time horizons. According to Morningstar’s report, only 12.7% of active US Large Blend funds outperformed their passive competition over a 10-year period.3 Morningstar further looks at active funds’ performance based on cost. Their analysis looks at the highest and lowest cost quintile of funds for their investment universe and their odds of successfully beating the more passive investment options. Lower-cost active US Large Blend funds had an 18.6% chance of outperforming versus the highest cost quintile of funds at 9.3% over the prior 10 years. Therefore, cost has a significant impact on a fund’s ability to beat their benchmark. Furthermore, even when looking at lower-cost active funds, they still underperform their passive equivalents.

In summary, while actively managed funds may be attractive when looking through a short-term lens, it’s important to note that:

1.) Past performance is not an indicator of future returns.

2.) As time increases, there is a higher probability that active funds will underperform their benchmark.

3.) Underperforming funds have an increased likelihood of being shut down.

4.) The impact of higher investment costs and taxes from active funds creates a significant hurdle to outperformance.

5.) Identifying active managers who can consistently deliver strong performance over extended periods in advance is a challenging task.

At TMG, we maintain our evidence-based philosophy that investing primarily in low-cost funds designed to track closely against a benchmark leads to an optimal outcome. That is not to say there is no place for active management in investment portfolios. When it makes sense and in certain asset classes, such as fixed income, investing in active management can be an effective tool. As always, please contact your advisor with any questions.

[1] S&P Dow Jones Indices. (2024). SPIVA® U.S. Scorecard. S&P Dow Jones Indices.

[2] S&P Dow Jones Indices. (2024). SPIVA® After-Tax Scorecard: The Effect of Taxes on Indices and Active Funds. S&P Dow Jones Indices.

[3] Morningstar. (2024). Morningstar’s US Active/Passive Barometer. Morningstar.

The Mather Group, LLC (TMG) is registered as a investment adviser with the Securities and Exchange Commission (SEC). Registration as an investment adviser does not imply a certain level of skill or training. For a detailed discussion of TMG and its investment advisory services and fees, see the firm’s Form ADV on file with the SEC at, or on the firm’s website at The opinions expressed, and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. The opinions expressed in this communication are based on TMG’s research and professional experience and are expressed as of the publishing date of this communication. All return figures and charts shown are for illustrative purposes only. TMG makes no warranty or representation, express or implied, nor does TMG accept any liability, with respect to the information and data set forth herein. TMG specifically disclaims any duty to update any of the information and data contained in this communication. The information and data in this communication does not constitute legal, tax, accounting, investment, or other professional advice. Investing involves some level of risk. Past performance does not guarantee future results.

An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. The index returns are all “Total Return” with dividends re-invested, which means the return is not only the change in price for the securities in the index, but any income generated by those securities. Indexes are unmanaged portfolios and investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.


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