Why Most Managers Lag the Market

Before costs, the average actively managed dollar earns the market return; after costs, it must trail. (William Sharpe, "The Arithmetic of Active Management".)

The appealing idea is simple: hire a clever manager who beats the market. The evidence says most do not. S&P's long-running SPIVA (S&P Indices Versus Active) scorecards compare active funds with their benchmarks — always after the fees investors actually pay — and the pattern is remarkably consistent across countries and decades.

In 2025, about 79% of US large-cap active funds underperformed the S&P 500. Stretch the window and it gets harder, not easier: over the fifteen years to the latest scorecard, not one of the 22 US equity fund categories had a majority of managers beat their benchmark.

Two structural forces explain it. Fees — active funds cost more, and that cost compounds against you every year. And arithmetic — as a group, active investors collectively are the market, so before costs they earn the market return and after costs they must, on average, fall short. This is not a claim that managers lack skill; it is that skill, in aggregate, is competed away and then taxed by fees.

Illustrative example: the longer the window, the wider the gap

The chart shows the share of US large-cap active funds underperforming over one, ten and fifteen years, measured after fees — and it climbs as the horizon lengthens. The figures move with each SPIVA update, so treat them as a direction, not a fixed number, and check the latest scorecard. The practical takeaway is steady: a low-cost index core is the rational default for the part of your pot meant to track the market.