Inevitably when you start to talk about how the vast majority of active managers cannot beat the index, someone will come forward claiming they are the exception. Their fund manager, which of course they chose in advance and have held for several years, was able to beat the market. If this describes you, then congratulations, but also...I am sorry to tell you the odds of this continuing are not in your favor.
An analysis looking at survival rates and how well Dimensional has done vs peers, showed that the majority of funds in virtually every category do not even survive a mere 15 years let alone put together a record of consistently generated alpha. What should also be equally surprising is how well Dimensional funds did during this period.
Again, the power of evidence-based investing is demonstrated in real life investment results as the graphic below from Dimensional Fund Advisors shows. Consider that in the large cap blend category 62% of funds that were around 15 years ago, are no longer in business.
This really does demonstrate that in order to invest for the long run, you need an approach that is built for the long run.
As far as that active manager continuing to beat the market... Well, I mentioned above it was unlikely to persist, and the evidence agrees with this conclusion as the graphic below from Dimensional Fund Advisors indicates. What is more interesting is how this applies to both equity and fixed income investments.
The S&P SPIVA report has furthered this conclusion showing that a majority of active professional investors are not beating their index. From 2001 to 2022 on average 65% of Large-Cap Domestic Equity Funds underperformed the S&P 500 Index. Yet the DFA US Large Company Fund (DFSUX) a fund that tracks the S&P 500 index while also employing DFA's evidence-based investment philosophy beat the S&P 500 from 2001-2022, 6.98% for DFA vs 6.89% for the S&P 500 index.
"In contrast to the near coin-flip chances of finding an outperforming large-cap manager, 63% of mid-cap funds underperformed the S&P MidCap 400® and 57% of small-cap funds underperformed the S&P SmallCap 600® in 2022. The lowest underperformance rate among domestic equity categories was in Small-Cap Core, in which 40% of active funds underperformed. At the other end of the spectrum, the Real Estate and Mid-Cap Growth categories saw the highest annual underperformance rates of 88% and 91%, respectively.
In international equities, a majority of actively managed funds underperformed in every category during 2022. However, in relative terms, managers in the International Small-Cap category continued to outshine their peers, with just 60% underperforming in 2022 compared to 69%, 68% and 76%, in the Global, International and Emerging Markets categories, respectively...we report majority underperformance in 11 out of 17 fixed income categories, topping out at 95% for actively managed Government Intermediate funds.
Echoing a frequent theme of SPIVA Scorecards over the past 20 years, underperformance rates generally rose with the length of the period over which they were measured. Of 39 reported categories, eight displayed majority outperformance over a one-year horizon, falling to just two categories over a five-year horizon."
While the number of funds that may beat the index goes up or down, the long-term trend shows that investors are not beating their respective benchmark over long periods of time. But the real conclusion here is how well evidence-based investing does across time periods, geographies, and asset classes. Ignore the crowd...Follow the evidence.