It’s well known that the majority of actively managed mutual funds underperform comparable index funds over any period longer than a few years. In fact, that statement has become so uncontroversial that even mutual fund salespeople freely acknowledge it. But a recent white paper co-authored by Rick Ferri, A Case for Index Fund Portfolios, takes this idea a step further.
Academic studies of mutual funds go back to the 1960s, and the well-known SPIVA scorecards are updated twice a year. So there’s no shortage of data on individual funds. But investors don’t use mutual funds in isolation: they build portfolios of funds in several asset classes. And there has been surprisingly little research on the performance of actively managed portfolios compared with passive alternatives.
Ferri introduced this idea in The Power of Passive Investing in 2011, and I wrote about his findings when that book came out. Now Ferri and his co-author Alex C. Benke have improved the analysis using more robust data. “The probability of outperformance using the simplest index fund portfolio started in the 80th percentile and increased over time,” the authors write in their summary.