Evidence Mounts of Active Management's Failed Promise


The drumbeat continues. When we last looked, the widely watched SPIVA's so-called persistence scorecard showed more dreadful results for active fund managers trying to beat their benchmarks.

Now, market researchers at Dimensional Fund Advisors are out with their 2018 Mutual Fund Landscape report. Just like in the SPIVA (S&P Indices Versus Active) scorecard, DFA's latest detailed study supplies more evidence that passive investing offers the best opportunities for investors to generate the greatest returns over time net of fees.

In this year's Landscape report, some 4,760 mutual funds were studied with total assets under management approaching $9 trillion, based on results through 2017. (See graph below.)

Assets Under Management by Asst Classes


 The sheer size of mutual funds in the American marketplace spotlights an important point that investors need to address -- millions of trades worth billions of dollars are transacted on a daily basis. "Using these trades as inputs, the market functions as a powerful information processing mechanism, aggregating vast amounts of dispersed information into prices and driving them toward fair value," DFA's analysts note.

So how well do active managers do in trying to outguess prices established by millions of different buyers and sellers each and every day? "Across thousands of funds covering a broad range of manager philosophies, objectives and styles," the Landscape report concludes, "a majority of the funds evaluated did not outperform benchmarks after costs."

Such findings, the report adds, "suggest that investors can rely on market prices."

If there's any doubt that claims by speculators of their prowess in timing market mechanics ring false, then consider the following tables included in the Landmark study.

A Fund's Past Performance Is Not Enough to Predict Future Results-eq

A Fund's Past Performance Is Not Enough to Predict Future Results-fi

These charts show the percentage of funds in the top quartile (25%) of three-year performance that ranked in the top quartile of performance over the following three years.

For example, notice just 29% of equity funds were ranked in the top quartile of performance in their category in both the previous period (2012–2014) and subsequent period (2015–2017).

This pattern plays out across both asset classes and time periods studied. "The assumption that strong past performance will continue often proves faulty, leaving many investors disappointed," the report points out.

Few Mutual Funds Have Survived and Outperformed-eq

Few Mutual Funds Have Survived and Outperformed-fi

Digging deeper, researchers breakdown equity funds by quartile turnover rates over three periods. (See chart above.) That information is compared to a fund's record against its respective Morningstar category benchmark. Winners are defined as those that survived and outperformed. At the same time, losers are funds that either didn't survive or lagged in each timeframe. 

The results show a clear pattern of underperformance by managers with high-to-medium turnover rates. Whether looking at shorter- or longer-term findings, such a data review indicates that trading activity hasn't translated into higher returns. 

At, a collection of more than 3,100 charts and 1,500-plus articles (not to mention our library of 2,500-odd books and better-than 400 videos) paints an even richer picture of active management's known failures. By comparing the average return of managers over their benchmarks and the variability of those returns, such evidence shows about 150 years of monitoring performance is necessary to statistically prove that a typical mutual fund manager was skillful rather than just lucky.

By contrast, passive investing as practiced by IFA's advisors provide investors with access to decades worth of market information in a highly transparent and verifiable manner. The idea is not to rely on speculation about what some fund manager thinks is going to happen. As detective Joe Friday might say in a parody of the classic Dragnet television series, "Just the facts, ma'am."  


US-domiciled open-end mutual fund data is from Morningstar and Center for Research in Security Prices (CRSP) from the University of Chicago.
Equity fund sample includes the Morningstar historical categories: Diversified Emerging Markets, Europe Stock, Foreign Large Blend, Foreign Large Growth, Foreign Large Value, Foreign Small/Mid Blend, Foreign Small/Mid Growth, Foreign Small/Mid Value, Japan Stock, Large Blend, Large Growth, Large Value, Mid-Cap Blend, Mid-Cap Growth, Mid-Cap Value, Miscellaneous Region, Pacific/Asia ex-Japan Stock, Small Blend, Small Growth, Small Value, and World Stock. For additional information regarding the Morningstar historical categories, please see “The Morningstar Category Classifications” at Fixed income fund sample includes the Morningstar historical categories: Corporate Bond, High Yield Bond, Inflation-Protected Bond, Intermediate Government, Intermediate-Term Bond, Muni California Intermediate, Muni California Long, Muni Massachusetts, Muni Minnesota, Muni National Intermediate, Muni National Long, Muni National Short, Muni New Jersey, Muni New York Intermediate, Muni New York Long, Muni Ohio, Muni Pennsylvania, Muni Single State Intermediate, Muni Single State Long, Muni Single State Short, Short Government, Short-Term Bond, Ultrashort Bond, and World Bond. For additional information regarding the Morningstar historical categories, please see “The Morningstar Category Classifications” at

Index funds and fund-of-funds are excluded from the sample. Net assets for funds with multiple share classes or feeder funds are a sum of the individual share class total net assets. The return, expense ratio, and turnover for funds with multiple share classes are taken as the asset-weighted average of the individual share class observations. Fund share classes are aggregated at the strategy level using Morningstar FundID and CRSP portfolio number.
Each fund is evaluated relative to the Morningstar category index assigned to the fund’s category at the start of the evaluation period. So, if, for example, a fund changes from Large Value to Large Growth during the evaluation period, then its return will still be compared to the Large Value category index. Surviving funds are those with return observations for every month of the sample period. Winner funds are those that survived and whose cumulative net return over the period exceeded that of their respective Morningstar category index. Loser funds are funds that did not survive the period or whose cumulative net return did not exceed their respective Morningstar category index.
Index data provided by Bloomberg Barclays, MSCI, Russell, FTSE, and S&P Dow Jones Indices. Bloomberg Barclays data provided by Bloomberg. MSCI data © MSCI 2018, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. FTSE fixed income indices © 2018 FTSE Fixed Income LLC, all rights reserved. S&P and Dow Jones data © 2018 S&P Dow Jones Indices LLC, a division of S&P Global.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio.
Consider the investment objectives, risks, and charges and expenses of the Dimensional funds carefully before investing. For this and other information about the Dimensional funds, please read the prospectus carefully before investing. Prospectuses are available by calling Dimensional Fund Advisors collect at (512) 306-7400 or at Dimensional funds are distributed by DFA Securities LLC.

Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
Mutual fund investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost. Diversification neither assures a profit nor guarantees against a loss in a declining market. There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results.