Every so often someone asks why we do not try to pick the managers who will beat the market. It is a fair question. The honest answer is not that beating the market is impossible — it is that identifying who will do it, before they do it, is the part nobody has solved.
Here is the evidence we look at, including the evidence against our own position.
The number everyone quotes
S&P Dow Jones Indices publishes a report called the SPIVA U.S. Scorecard twice a year, comparing actively managed funds against the benchmarks they are measured on. In the edition covering the period through 30 June 2025, actively managed U.S. large-cap funds underperformed the S&P 500 as follows.
| Period | Share of large-cap funds that underperformed |
|---|---|
| 1 year | 72.6% |
| 5 years | 86.9% |
| 10 years | 86.0% |
| 15 years | 88.3% |
The first half of 2025 on its own was better for active managers: 54% underperformed, against 65% for the whole of 2024. Active management has good stretches. The pattern is what matters, and the pattern gets worse the longer you look.
Now the argument against that number
SPIVA is not universally accepted, and the objections to it are serious enough to state properly rather than ignore.
Three academics — Martijn Cremers of Notre Dame, Jon Fulkerson of the University of Dayton and Timothy Riley of the University of Arkansas — published research, sponsored by the Investment Adviser Association’s Active Managers Council, arguing that SPIVA overstates the case. They raise three objections.
- Funds that close are counted as failures. They argue a fund should be judged on the period it actually operated, rather than penalized for shutting down.
- Every fund counts equally, regardless of size. They argue the meaningful question is how the dollars actually invested performed, not how the average fund performed.
- You cannot buy an index. Comparing a fund to the S&P 500 compares it to something nobody can purchase. The real comparison is against an index fund, which has costs of its own.
Recalculated their way, 55% of assets underperformed rather than SPIVA’s 92%. They describe the result as close to a coin flip.
Take the critics at their word. It still does not help you.
They are not equally strong. The weakest is the first: funds do not close because they are winning, and judging a fund only over the years it survived reintroduces the very survivorship bias the scorecard exists to remove. The third is true but small — a large index fund tracks its benchmark to within a few hundredths of a percent. The second, asset weighting, is the serious one, and it has real merit.
It is also worth knowing who funded the work. The Active Managers Council is an advocacy body for active management. That does not make the research wrong, but it is the same test we would apply to a study published by an index provider, and it should be applied evenly.
The conclusion holds anyway, for two reasons.
The first is arithmetic. Even on the most generous reading, a majority of actively managed money underperformed — and it charged more to do it. A coin flip you pay extra for is not a good trade.
The second matters more. The argument about how many managers beat the market is the wrong argument. What matters to someone deciding where to put their money is whether the winners can be identified in advance.
Which is where persistence comes in
S&P publishes a second, less famous report: the Persistence Scorecard. It asks a narrower question. Of the funds that did beat their peers, how many kept doing it?
From the year-end 2025 edition:
- Of the large-cap funds in the top quartile in 2023, 29% were still there through 2025.
- Of the domestic equity funds in the top quartile in 2021, none remained in the top quartile through 2025. Not a small number. None.
- Among small-cap funds, 17% held top-quartile status over two years, and 2% over five.
And the figure that settles it for us: 4.5% of above-median large-cap funds stayed above median over five consecutive years. If results were purely random, you would expect 6.25%.
Persistence was worse than chance.
That is the whole argument in one number. Skill you cannot identify beforehand is, at the moment you have to choose, indistinguishable from luck.
And every number above is before tax
SPIVA measures pre-tax returns. So does the research criticizing it. The 92% and the 55% are both figures from a world with no tax bill.
S&P publishes an after-tax version of the scorecard, and it moves in one direction. Over a 20-year horizon, domestic equity funds went from 92% underperforming before tax to 97% after it. Large-cap funds went from 95% to 98%. In the year-end 2024 edition, the median active large-cap fund trailed the S&P 500 after tax by as much as 4.4% a year.
The mechanism is turnover. An active manager justifies the fee by trading, and trading realizes gains. Those gains are distributed to you and you owe tax on them — including in years when the fund itself lost money. Index ETFs distribute capital gains rarely, because of how they are built.
One study of the period from 1993 to 2017 put it plainly: the average surviving fund gave up 1.1% a year to fees, and a further 2.4% to taxes.
None of this applies inside your IRA or your 401(k), where distributions are not taxable events. It applies to the taxable account — which for most households is where the flexibility lives, and where a drag like that compounds for decades.
What we do instead
We own the market. The same low-cost approach runs across stocks, fixed income and alternatives, with index ETFs doing most of the work, and option strategies only where a position calls for one.
The unglamorous half matters more than it sounds. Accounts are monitored daily rather than reviewed once a quarter, and rebalancing runs through Schwab’s iRebal software, so drift is corrected on a rule rather than whenever someone remembers to look.
Owning the market is a bet that the world keeps working. If it stops, your portfolio is the least of anyone’s concerns — so we assume it keeps going, and we build to grow with it.
What indexing does not do
Three things worth being clear about, because the case for indexing is often oversold.
It will not protect you in a downturn. When you own the market you own its losses too. Indexing is not a risk-management strategy. The asset allocation around it is.
It will not beat the market. By construction you receive roughly the market’s return, less a small cost. Anyone offering the market’s return with less than the market’s risk is describing something else.
It does not make the plan. The index is a tool. When to sell, which account to hold what in, what to do with a windfall, how to fund a large purchase without wrecking a tax year — that is where the work actually is, and no fund choice does it for you.
The short version
Most active managers underperform. The critics of that finding have a point, and even their kinder numbers leave a majority behind — all of it measured before tax, which raises the bar again in a taxable account. But the reason we do not try is simpler than either figure: the funds that win rarely keep winning, and over five years they repeat less often than chance would predict. So we do not spend your money guessing which ones will. We own the market, keep the costs down, and spend our time on the decisions that are actually within someone’s control.
Managing the portfolio is one part of a larger job.
Figures are from the SPIVA U.S. Scorecard (Mid-Year 2025, covering the period through 30 June 2025) the U.S. Persistence Scorecard (Year-End 2025) and the SPIVA After-Tax Scorecard, all published by S&P Dow Jones Indices. The 1993 to 2017 fee and tax figures are from research by Arnott, Kalesnik and Schuesler. The methodology critique referenced is research by Cremers, Fulkerson and Riley, sponsored by the Investment Adviser Association’s Active Managers Council. Indices are unmanaged, do not reflect fees or expenses, and cannot be invested in directly. Past performance is not indicative of future results.
