Active Management’s Persistent Failure: A 2025 Perspective

Charles Ellis’s classic work, Winning the Loser’s Game—first published as a book in 1985, building on his landmark 1975 Financial Analysts Journal article— highlighted a sobering reality for investors: only about 20% of actively managed funds—those attempting to beat the market through security selection or market timing—were able to generate a statistically significant alpha, and that was before factoring in taxes. For taxable investors, taxes often exceed both expense ratios and trading costs, further eroding any outperformance. Ellis concluded that active management is a “loser’s game”—winnable in theory, but with odds so poor that the rational choice is not to play. Instead, he advocated for systematically managed vehicles like index funds, where the odds are stacked in the investor’s favor.

The Odds Have Gotten Even Worse

Since Ellis’s original analysis, the landscape for active management has only grown more challenging. As detailed in my book The Incredible Shrinking Alpha, co-authored by Andrew Berkin, the proportion of actively managed funds delivering statistically significant alpha has now dropped below 2%. Several structural trends explain this persistent decline:

• Academic research has transformed alpha into beta: What was once considered manager skill is now often explained by exposure to systematic risk factors.

• The pool of less-informed investors (“victims”) has shrunk: As markets have become more professionalized, there are fewer easy targets.

• Competition has intensified: The rise of sophisticated institutional investors has made it harder for anyone to gain an edge.

• More dollars are chasing alpha: Increased competition for a shrinking pool of opportunities dilutes potential outperformance.

SPIVA 2025: The Scorecard Doesn’t Lie

The S&P Dow Jones Indices SPIVA Scorecard, the industry standard for benchmarking active versus passive performance, provides the most rigorous verdict available on active management. Importantly, SPIVA accounts for survivorship bias by including the records of funds that closed or merged during the period—a methodology that prevents the data from flattering active managers. Among the key findings:

Unless otherwise noted, figures below are shown as equal-weighted (asset-weighted), meaning the first number treats all funds equally while the parenthetical figure weights funds by assets under management. Over the 20-year period ending in 2025, 95.0% of all domestic funds underperformed the S&P 1500 Composite Index. And of the 18 domestic fund categories (including variations of large, mid, small, value, growth, and real estate), in only three categories did less than 90% of the funds underperform their benchmark. The “best” category was mid-cap growth funds in which 86.8% of funds underperformed.

On a risk-adjusted basis the performance was even worse, with 97.7% of domestic funds underperforming the S&P 1500 Composite Index. Less than one-half (47.3%) of domestic funds even survived the full 20-year period.

On an equal- (asset-) weighted basis, domestic funds underperformed the 1500 Composite Index by 2.59% (1.47%).

For those who subscribe to the conventional wisdom that the market for small caps is less efficient, on an equal- (asset-weighted) basis small growth funds underperformed the S&P 600 SmallCap Growth Index by 1.34% (0.49%), small-cap core funds underperformed the S&P 600 SmallCap Index by 1.69% (0.98%), and small value funds underperformed the S&P 600 SmallCap Value Index by 1.25% (0.32%). Further, on an equal- (asset-) weighted basis REIT funds underperformed their S&P REIT benchmark by 1.71% (1.28%).

The international evidence was just as compelling.

Over the 20-year period, 94.4% of emerging market funds underperformed the S&P/IFCI Composite Index and 84.8% of international small-cap funds underperformed their benchmark (the S&P Developed Ex-US SmallCap Index). The failure rates were the same on a risk-adjusted basis.

Over the last 15-year period, 95.6% of global funds underperformed the S&P World Index, and 92.7% of international funds underperformed their benchmark (S&P World ex-US Index). On a risk-adjusted basis the performance was even worse, as 99.5% of global funds underperformed and 93.7% of international funds underperformed.

Over the 15-year period, on an equal- (asset-) weighted basis global active funds underperformed by 2.87% (1.46%) and international funds by 1.49% (0.64%).

Over the 20-year period, on an equal-weighted basis international small funds underperformed by 0.65%. However, on an asset-weighted basis they outperformed by 0.27%—the single instance of outperformance in the entire dataset. It is worth noting that this margin is modest, is not replicated on an equal-weighted basis, and reflects pre-tax returns; after taxes, even this narrow edge would likely disappear for most investors. Emerging market funds did not fare as well as they underperformed by 1.78% on an equal-weighted basis and by 0.82% on a value-weighted basis.

The evidence was also compelling when it came to fixed income managers.

In the 11 categories (general investment grade, intermediate investment grade, high yield, mortgage-backed, inflation linked, emerging markets, global income, general municipal, California municipal, New York municipal, and loan participation funds) where 20-year data was available, the percentage of underperformers ranged from 71.7% (global income) to 100% (loan participation). The median category saw roughly 85% of funds fail to beat their benchmark—a result that dispels the notion that bond markets offer active managers a more exploitable opportunity set than equities.

And for taxable investors, it is important to remember that all of the above figures are based on pre-tax returns.

The Virtuous Circle of Passive Investing

For investors, the implications are clear. The relentless competition among providers of passively managed funds—those constructed using transparent, evidence-based rules—has driven costs to unprecedented lows. Today, investors can access broad-market index funds with expense ratios as low as a few basis points annually, or even zero, as with the Fidelity ZERO Total Market Index (FZROX). This downward pressure on fees is making passive investing even more advantageous, creating a virtuous circle: lower costs attract more investors to passive strategies, which in turn shrinks the pool of less-informed investors that active managers can exploit, making it even harder to generate alpha.

Key Takeaway

The data is unequivocal: active management’s persistent failure is not a temporary phenomenon, but a structural reality. Whether you are an individual investor deciding where to allocate your savings or an advisor helping clients navigate their options, the evidence points in one direction. For investors, the prudent path remains clear—embrace low-cost, systematically managed funds and let the odds work in your favor.

Larry Swedroe is the author or co-author of 18 books on investing, including his latest Enrich Your Future. He is also a consultant to RIAs as an educator on investment strategies. This article is for informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice.