Through examination of current and survivor-bias-minimized fund data, as well as other academic studies on this issue, we find that index management outperformed active management in most asset classes.
Surprisingly, index management outperformed active management in the Small-Cap Value and Small-Cap Growth asset classes—precisely the asset classes where one would expect active management to outperform.
In the areas where active management outperformed index management, there were signs that this trend may be nearing an end. For example, active management in Mid-Cap Value and Small-Cap Blend outperformed index management over longer periods of five and ten years, but underperformed index management in near-term one-year or three-year periods.
As index funds can periodically be unsuccessful in replicating their respective indices, we also compared the active manager universe to the Standard & Poor's Blend and S&P/Barra Growth and Value indices. The S&P indices outperformed the majority of actively managed funds in all U.S. asset classes, including Mid-Cap Value and Small-Cap Blend.
Finally, we reviewed academic studies that examined the "persistence" of investment manager performance. Often, persistence studies examine active manager's ability to generate consistent (or persistent) performance. While most of these studies found some evidence of persistence, it is important to note that several of these studies found that the persistence phenomenon was mainly due to the persistent underperformance of the lowest returning funds.
