Seeking Alpha
Stop Looking for the Next Great Fund Manager
The problem is not that skilled active managers cannot exist. It is that an investor must identify them before the fees, style changes and bad years arrive.
· 5 min read
The active-versus-passive debate is usually framed around a question nobody needs to answer: can a fund manager beat an index?
Of course one can. Some do.
The investor’s actual problem is harder: can I identify that manager in advance, distinguish skill from a favourable style cycle, remain invested through the period in which the evidence looks worst, and keep enough of the advantage after fees and taxes?
Finding yesterday’s winner is research. Finding tomorrow’s winner is the investment decision.
The benchmark is not standing still
An index fund does not need insight. It needs to deliver the index, less a small cost and implementation difference. An active fund begins with the same market return and then must overcome expenses, trading costs, cash drag and its mistakes.
That does not make outperformance impossible. It makes it a negative-sum contest relative to the market before costs and a harder contest after them.
S&P Dow Jones Indices has measured this problem for more than two decades through its SPIVA scorecards. In the U.S. Mid-Year 2025 scorecard, 96.17% of active large-cap funds underperformed the S&P 500 on a risk-adjusted basis over the 20 years ending June 30, 2025. For all domestic U.S. equity funds, the corresponding figure was 96.84%.
The equal-weighted performance table is equally uncomfortable. Over the same 20-year period, the S&P 500 returned an annualised 10.73%, while the average large-cap active fund returned 8.77%—a 1.96 percentage-point annual gap. The asset-weighted active-fund result was better, at 9.48%, but still below the index.
Those are category results, not a statement that every active fund failed. They also come from an index provider with a commercial interest in indexing, which is worth acknowledging. The methodology’s value is that it includes survivorship and style consistency rather than quietly examining only the funds still available for purchase.
The fund you bought may not remain the fund you chose
Manager selection is usually discussed as a performance problem. It is also an identity problem.
Over long periods, funds close, merge, change managers or migrate between styles. A successful small-cap manager attracts assets and may move up the market-cap spectrum. A concentrated strategy becomes diversified. A value process experiences years in which growth leads, and investors leave before the cycle turns.
In the SPIVA report, only 39.64% of the global funds that existed at the beginning of the 20-year measurement period survived to its end. For international funds, survival was 37.64%. Survival is not performance, and these are not the large-cap domestic category, but the figures illustrate a due-diligence problem that a simple trailing-return screen does not capture: the product itself is not a constant.
An index changes too, but according to a published methodology rather than the career path of a particular person.
The strongest case for active management
The case deserves better than a straw man.
Active management may be more plausible where markets are less liquid, information is uneven, benchmark construction creates forced behaviour, capacity is limited or the investor has a mandate the index does not serve. An active manager may manage taxes, avoid a concentration, hold cash for withdrawals, incorporate values or control a particular downside exposure.
Even in U.S. equities, the latest year can favour active managers in a category. SPIVA’s long-horizon result does not prove that markets are perfectly efficient or that no one possesses skill.
It says that “somebody will win” is not a selection process.
An investor choosing active management should be able to answer:
- What repeatable edge does this manager have?
- Why is that edge not already competed away?
- What capacity limit protects it?
- Which benchmark genuinely matches the mandate?
- How much underperformance, for how long, will we tolerate?
- What evidence would distinguish a normal bad period from a broken process?
- What happens if the named manager leaves?
If those questions do not have written answers, the holding is probably faith with a factsheet.
Passive is not innocent
Owning an index does not remove risk. It chooses a transparent set of risks.
A capitalization-weighted index allocates more to companies after their market values rise. It can become concentrated in a sector or a handful of firms. It does not assess valuation, protect against drawdowns or know when the investor needs cash. A narrow thematic ETF can be passive in implementation and highly active in economic exposure.
The conservative case is therefore not “buy any index.” It is to use broad, low-cost, transparent exposures for jobs where manager selection has not shown a reliable advantage, then spend the limited complexity budget where the investor has a specific problem worth solving.
Passive should be the default, not a religion.
The portfolio decision
For most investors, the core equity allocation should not depend on repeatedly selecting rare winners. A broad market index makes the market return—not manager selection—the primary source of the outcome.
An active allocation, if used, should have a defined job and a benchmark. It should also have an exit rule written before the inevitable period of underperformance. Otherwise the investor is likely to buy after a winning streak and sell after the evidence becomes uncomfortable, turning even genuine manager skill into a poor investor return.
The contrarian position is not that active managers are unintelligent. It is that the investor should be humble about identifying rare skill from the outside.
The boring choice accepts being average before costs so that it has a better chance of being above average after them.
Is your portfolio a collection of past winners or a system built around your goals? Book a portfolio review. We will map what each fund is meant to do, identify overlapping exposures, and examine whether every active holding has earned its place.
Sources
- S&P Dow Jones Indices, SPIVA U.S. Scorecard, Mid-Year 2025, data through June 30, 2025. Returns longer than one year are annualised. Underperformance and survivorship figures are reproduced from the report’s risk-adjusted, performance and survivorship tables.
- S&P Dow Jones Indices, SPIVA research library, for scorecard methodology and subsequent editions.
General information and education, not personalised investment advice or a recommendation to buy or sell any fund or security. Historical results do not guarantee future outcomes. Indices are unmanaged and cannot be purchased directly. North Pole South Pole Financial Services is an AMFI-registered Mutual Fund Distributor (ARN-286779), not a U.S. investment adviser or a SEBI-registered investment adviser.
