S & P Dow Jones Indices is out with its annual survey of the performance of active fund managers, and once again the performance is dismal. Sixty-five percent of large-cap fund managers underperformed their benchmark (the S & P 500) in 2024. The long-term performance is even worse: 84% underperformed after 10 years. The SPIVA U.S. Scorecard , run by S & P Dow Jones Indices, is the gold standard for evaluating the performance of active fund managers against their benchmarks. The 2024 report includes more than 2,000 mutual funds and ETFs in the U.S., substantially all the domestic funds in the U.S. 2024 in line with historic averages, but small cap did better Last year’s large-cap fund tally was slightly worse than the 24-year average of 64% of funds underperforming. Mid-cap managers did not fare any better although ,surprisingly, small-cap managers had a better performance: only 30% underperformed their benchmarks, far below the historic average of 60% underperforming. Fund manager underperformance in 2024 Large-cap managers: 65% Mid-cap managers: 62% Small-cap: 30% Source: SPIVA Why did small cap managers do relatively well last year? The S & P 600 small-cap index returned less than 7% last year, “and there was a huge return differential (16%) between the large cap S & P 500 and the small cap S & P 600,” Anu Ganti, head of U.S. Index Investment Strategy for S & P Dow Jones Indices and the author of the report, told CNBC. “That may have helped active small cap managers because they may have been able to take on exposure to larger cap stocks.” Active managers long-term track record terrible Over the 24-year history of the SPIVA survey, one striking feature stands out: not only do the majority of fund managers underperform each year, but the underperformance rates go up as the time horizon lengthens. As bad as it is, the underperformance only gets worse still after 10 years. Large-cap fund managers underperformance (vs. S & P 500) After 1-year: 65.2% After 5-years: 76.2% After 10-years: 84.3% After 20-years: 92.0% Source: SPIVA “These numbers have not changed much over the years, showing how difficult it is to outperform long-term,” Ganti told me. Surveying the results, the 2019 SPIVA study concluded, “[T]he persistence of fund performance was worse than would be expected from luck.” An important point about the SPIVA study: it accounts for both fees and survivorship bias. Many funds liquidate or merge over time. Over a 10-year period, about one-third of funds go out of business, largely due to poor performance, but the SPIVA report accounts for those funds. Long-term, it’s really hard to beat the market Beating the stock market is a very difficult game. Stock pickers tend to do better during periods when: 1) there is high volatility, 2) markets are trending down, and 3) megacaps are underperforming. With the exception of a few moments, none of those conditions prevailed in 2024: volatility was relatively low, the S & P 500 returned another strong year (total return of 25%) and there was a generally strong performance from a small group of large-cap tech stocks. It’s particularly tough for active managers when a small group of stocks push the indexes up all year, as again happened for most of last year. Why? When a small group of stocks lead, active managers would have to pick those exact few stocks that outperformed — and have an even higher concentration in them to outperform. But it is almost impossible to consistently pick those few winners and, at any rate, active managers are usually reluctant to take such concentrated bets. Active management outperformance is getting harder Active managers do not underperform because they are dumb. Just the opposite, Ganti tells me: the quality of active managers has never been higher. “Everyone is getting too smart,” Ganti told me. Ganti identified three consistent problems active managers encounter: 1) Active managers’ fees are higher than index fund fees; 2) The market is composed of professional traders who do not have an information advantage; and 3) Only a minority of stocks typically outperform in any given year, and it is almost impossible to select what stocks will outperform ahead of time. “It boils down to the increasing professionalization of the industry, the higher costs, and the fact that there is only a handful of stocks that drive outperformance, and it’s like finding a needle in a haystack to identify them,” Ganti said. Outperformers don’t last If 90% of active managers underperform the market over time, why not just take the 10% that do outperform? Answer: the 10% who do outperform don’t last long either. “The top fund managers who do outperform over short periods do not do so for very long,” Ganti said. “A fund manager that outperforms over, say, a five-year period is unlikely to be the same fund manager that outperforms in the next five years.” There is also a very big difference between luck and skill. The data shows that a good part of the reason that 10% outperform is luck, and that is very different from skill. “If I am a good stock picker one year, you might expect me to be a good stock picker next year,” Ganti said. “But the data indicates that the success of the small minority of active managers that do outperform is more attributable to luck than skill. If there really was skill, you would think the best would outperform consistently, but they do not.” “This really makes the case for diversification and the use of low-cost indexing,” Ganti said. “Being a stock picker is hard work, and 2024 again demonstrated the difficulty of finding those managers.”