Imagine this: Every day, the world’s active fund managers play a round of golf. But every night, hardworking crews build new sand traps. They also roughen up the grass. They build new ponds every night that they hope might swallow balls.

Every player wants to do well. But most fall short. Some toss their clubs in frustration and stomp off the course long before the 18th hole. The golf course officials say, “About two-thirds of the players fail to beat par.” But they don’t count the players who quit in disgust. If they counted the quitters, their results would look a lot worse.

The golf course represents the stock market. Every day it changes. When a fund manager beats par that means they beat their benchmark index. It’s often said that two-thirds of America’s fund managers fail to beat their index in any given year. But like my little golf story, this stat doesn’t include the quitters.

Some actively managed funds might develop a strong track record. But when they hit sand traps more than greens, the fund often disappears. That happened to Bill Miller’s Legg Mason Value Trust. Not long ago, it was the Jack Nicklaus of funds. It beat the S&P 500 index 15 years in a row, between 1991 and 2005. But from 2005 until 2011 it was like Miller played golf with a giant hockey stick. His fund lost 36.04 percent from January 2006 until January 2012. By comparison, over the same time period, Vanguard’s S&P 500 gained 13.75 percent.

Five Years After Legg Mason’s Winning Record
January 2006 – January 2012

Five Years After Legg Mason’s Winning Record

Today, you can’t find the Legg Mason Value Trust. After a string of horrific years, its name had turned to mud. That’s why the company changed the fund’s name to ClearBridge Value Trust. Fortunately, SPIVA tracks the number of actively managed funds– like Legg Mason Value Trust– that drop out of sight. Over the 15-year period ending December 31, 2018, a whopping 56.89 percent of U.S. domestic funds had changed their names, merged with another fund or somehow disappeared. Actively managed funds covet great brand names. They don’t change their names while they’re winning…but they try to hide them when they lose.

Fifteen years ago, Americans could choose from any number of 1,923 actively managed U.S. stock market funds. SPIVA tracked the performance of those funds to see how many beat their benchmark indexes. The overall results were worse than you might think.

For example, over the 15-year period ending December 31, 2018, the S&P 500 index beat 91.62 percent of actively managed U.S. Large-Cap funds. The Mid-Cap 400 index beat 92.71 percent of actively managed U.S. Mid-Cap funds. And the S&P Small-Cap 600 index beat 96.73 percent of U.S. actively managed Small-Cap funds.

Actively Managed Funds Measure 15 Years of Sham
December 31, 2003 – December 31, 2018

Number of Actively Managed Funds Per Category* Percentage That Lost To Their Benchmark Index
All Domestic Funds 1923 88.97%
All Large-Cap Funds 681 91.62%
All Mid-Cap Funds 329 92.71%
All Small-Cap Funds 397 96.73%
All Multi-Cap Funds 516 90.70%
Large-Cap Growth Funds 185 94.59%
Large Cap Core Funds 316 92.09%
Large-Cap Value Funds 180 79.33%
Mid-Cap Growth Funds 152 91.45%
Mid-Cap Core Funds 101 95.05%
Mid-Cap Value Funds 76 92.11%
Small-Cap Growth Funds 164 98.17%
Small-Cap Core Funds 156 97.44%
Small-Cap Value Funds 77 93.51%
Multi-Cap Growth Funds 127 90.55%
Multi-Cap Core Funds 225 92.44%
Multi-Cap Value Funds 164 86.59%
Real Estate Funds 58 86.21%

The past 15 years is a strong benchmark to measure fund managers’ skill. After all, it included plenty of good years, and history’s second-biggest single-year decline. In 2008, the S&P 500 fell 37 percent. That’s further than the single year decline of 1929 (-8.42%) and it’s further than the single year decline of 1930 (-24.90%). If active fund managers could have seen 2008 coming, they would have sold stocks for cash. But that wasn’t the case. In 2008, the S&P 500 beat 64.23 percent of U.S. actively managed funds.

The S&P 500’s Worst Single Year Declines

Year Calendar Year Decline
1931 -43.34%
2008 -37.00%
1937 -35.03%
1974 -26.47%
1930 -24.90%

To be fair, index funds don’t beat their benchmarks either. But after fees and tracking error, a low-cost index fund will just be a smidge behind. For example, over the 15-year period ending July 2, 2019, the S&P 500 averaged a compound annual return of 8.93 percent. Over the same 15 years, Vanguard’s 500 Index Fund Admiral Series (VFIAX) averaged a compound annual return of 8.91 percent. After costs and tracking error, it underperformed the S&P 500 by a compound annual return of just 0.02 percent.

SPIVA’s research reveals what we already know. It’s tough to beat an index with an actively managed fund. But when SPIVA also counts funds that disappear, they hammer far bigger nails into active management coffins.