Writing about investing often brings recurring themes, such as:
We aim for consistent gains rather than aiming for huge wins. In the short term, the market behaves like a voting machine, but in the long term, it acts as a weighing machine. Avoid putting all your resources in one investment. Follow the trend. Don’t oppose the Federal Reserve.
Another common sentiment is: We believe it’s a market suited for stock-pickers. This viewpoint suggests that sometimes the market experiences a tide that raises all assets, while at other times, a clear disparity exists between winners and losers, presenting active managers with better chances to select the right investments.
Examining the Data
I previously explored this question in August 2024, comparing years with significant return variances among S&P 500 stocks to see if actively managed funds performed better during these times. (Announcement: They performed slightly better but still lagged overall.)
This time, I analyzed the annual percentage of index components that outperformed the overall benchmark. I focused on actively managed funds that used the S&P 500 as their benchmark. A stronger “win rate” among index stocks should theoretically facilitate higher returns for active managers selecting the right stocks.
My findings indicated a slight correlation between the success rate of individual stocks and the proportion of actively managed funds beating the index. Generally, funds performed better in years with a higher percentage of stocks exceeding the average return, though the correlation was weak.
Furthermore, a trend analysis of actively managed funds from 1999 suggested declining success rates over time. In 2000, more than two-thirds of actively managed funds outperformed their benchmark, but by September 30, 2025, this rate had fallen to just 26.7%.
Conclusion
Overall, the evidence suggests that most active managers do not provide sufficient value to offset their expenses, even in favorable conditions for stock picking. Additionally, it is unpredictable when the market may favor active management. The likelihood of achieving better returns through paid active management remains low, irrespective of the prevailing market conditions.
