Why Active Management So Often Loses

Why Active Management So Often Loses

The narrative of active underperformance is not just anecdotal its structural.

Over the last 15 years, 89.5% of U.S. large-cap funds underperformed the SP 500, leaving only 10.5% that outperformed (SPIVA, Year-End 2024).

Why?

Over-diversification. Regulations and prudent man norms push managers to hold 7080 stocks. Yet research by Miguel Antonio et al. (2021) shows that managers best ideas typically only 2530 high-conviction stocks outperform the rest of their holdings by 2.8% to 4.5% annually. The additional holdings are largely ballast for compliance and risk control, which dilutes results.

Career risk and closet indexing. As Keynes warned, it is better for reputation to fail conventionally. Many managers hug benchmarks to protect their jobs. The outcome is index-like portfolios that still charge active fees.

Fees. Even if alpha exists, high fees (0.5%1.5%) erase it. Fidelity Magellan in the 1990s became a classic case: essentially delivering the SP 500 minus ~1% in costs.

The paradox? The data are clear: managers strongest convictions generate alpha, but those gains are hidden inside bloated portfolios and lost to fees.

So yes, systematic active strategies and truly concentrated managers can deliver value. But the average active dollar faces structural headwinds and the statistics are relentless.