Vol 3, Issue 6. Quarter 2 – 2026

There is a pretty good chance that you never heard of SPIVA – which stands for “S&P Indices Versus Active.” In particular, you should look into the SPIVA scorecards which are updated twice per year at https://www.spglobal.com/spdji/en/research-insights/spiva/.

The most recent update was posted over the last few days. In short, what these reports do is show a performance comparison between Actively Managed Mutual funds and their most relevant benchmarks. Just in case you don’t know, the Benchmark is the index that the fund is most comparable to. It is probably obvious that the thinking is that a Mutual Fund should include a management fee because a professional manager is expected to “beat the market”. This means that if a manager accepts the same level of risk as the benchmark, it only makes sense to pay them a fee if there is good reason to believe that the fund will perform better than that benchmark. If there is no reason to believe that they can do that, then any fee that they charge is a waste of money.

To be fair, it is never reasonable to expect a fund manager to beat the market every single year. We are merely saying that they should do it often enough to justify the fee. Common sense suggests that active fund managers should beat the market at least ½ of the time because I can pick stocks at random and accomplish that. If there is no skill involved at all, I would still expect that 50% of them will produce returns below the average, while the other 50% create returns above that level. Let us also note that, since the fund chooses a smaller number of stocks than the index, it is less diversified, and therefore carries more risk. This suggests that the premium, meaning the amount by which it beats the market on average must be substantial to compensate for the higher risk.

Clearly a “good” manager will be even better than that. A mountain of marketing material also states that a great way to find a good manager is to look at the historical performance of the fund(s) that they manage. If a fund has a great 5 or 10-year “track record” it sounds reasonable to assume that this will continue into the near future.

What Does the Data Say?

The main or “headline” figures in each SPIVA report show the proportion of actively managed funds that outperformed their benchmarks over some time horizon. Again, common sense suggests that this figure should be close to 50%, and it should not really matter what the time horizon is, as long as the funds and market returns are viewed over the same time frame. Again,
if this is not true, then this suggests that Active Management represents a waste of money. The SPIVA reports also rank funds into quartiles meaning top 25%, the next 25%, the next 25% and the bottom 25% respectively. The marketing literature suggests that if a fund is in the top 25% of performers over some time period (for example 5 years) then that fund should have a greater than 25% chance of being in the top quartile in the next period. In the worst case scenario, this probability will be about 25% based on chance alone. Surely, it won’t be below that level unless the fund manager adds negative value.

It should be noted that while the S&P 500 is the most frequently used benchmark, it is not the best selection for all funds to be compared to. Some funds have a much larger focus on stocks issued outside of the US. Others focus on smaller firms “Mid-Cap” or even “Small-Cap” firms. Other funds focus on specific sectors such as Technology, Transportation, Retailers, etc. We should not be surprised to see some sectors do better than the S&P 500 while others do worse, because the S&P 500 includes multiple sectors and, by construction, some will be above the overall average while others are below it. This just reflects what the word “Average” means.

I am laying these facts out so that you are not surprised to see that some small share of funds and managers are not quite as good as the benchmark. With that intro to help avoid “overselling” you on how great active management is let’s look at some of the numbers. Here are the proportion of mutual funds that outperformed their relevant benchmark over a few time horizons.

Category	1 Year	3 Years	5 Years	10 Years	15 Years
Large Cap	21.22%	33.16%	11.04%	14.41%	10.07%
Mid-Cap	44.59%	37.07%	27.68%	18.86%	15.51%
Small-Cap	59.35%	57.82%	37.33%	24.05%	10.10%
International	36.82%	23.62%	20.00%	10.22%	7.3%

For small cap stocks for this past year or over the past 3 years, you had a better than 50% chance of beating the benchmark. Of course, if you left your money there longer than that you probably lost. If you look over the past 15 years, using any segment of the market you lost (compared to the benchmark) at least 85% of the time.

Let me repeat that. Active management LOSES MONEY about 85% of the time, in comparison to the larger market. But wait – there’s more. The funds that outperformed over a 5 year period are not necessarily the same ones that outperformed over the larger 10-year period. In fact, only 4.5% of all large cap funds remained in the Top Half over a 5-year period. 

I don’t think that I am being sufficiently clear here. If performance is simply random, then the proportion o funds that are in the top 25% of all funds for another 4 years should be no worse than ½ to the fourth power, which is 1/16 or 6.25%. In other words, this performance (4.5%) is worse than it would be if you made no effort at all, by simply selecting stocks randomly, and leaving the portfolio alone. Let me state that differently. If you pick 20- stocks at random, you will do better than the average mutual fund almost every time.

Here are a few additional tidbits to chew on. Of the funds that were in the top quartile in 2022, the share of them that stayed in the top quartile for the following 2 years was 0%. You read that right – none, not one, zero, zilch, not a single damn fund. Let’s summarize what all of this data suggests.

• Most actively managed funds are worse than the benchmark to which they are compared over any time horizon
• The longer the time horizon, the more likely it is that the fund is a bad deal compared to the benchmark
• If a fund does “outperform” the benchmark for some period of time, it is less likely to do so in the next period
• On average – random selection is a much better strategy than active management

Please note that we have ignored the fact that the owner of an actively managed mutual fund is paying more in taxes than the index fund investor, and has a weaker understanding of what is actually owned.

I gotta tell you, I still feel like I am not being sufficiently clear here, so let me say this in yet another way.

If you cannot live without using a fund manager, then just send your money to me. I will buy an S&P 500 index fund, I will charge you 0.2% of your money as a management fee, and I will do ABSOLUTELY NO WORK WHAT-SO EVER.  Under this arrangement, the historical data suggests that you will do better than 85% of your friends over the next 15 years. Just think about how stupid it would be to accept my offer, after I tell you up front, that I will do absolutely no work. All I promise is that I will not actively try to make you worse off.

Here is the bottom line. The plan that you come up with (and I really don’t care what that plan is) is VERY likely to be better than you are going to do with a mutual fund manager. For that reason, I strongly suggest that you work with our standard approach, which is: A) do what you are best at; B) take the money that it pays you and invest in index funds; and C) let nature takes its course after that, and you will be fine! SPIVA says so – – and I agree!