The Importance of Being Active

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives A number of research studies conclude that active US equity open-end mutual funds underperform on average and that overall manager skill is diminishing. This contrasts with other studies documenting systematic ways investors can identify managers who subsequently outperform. In this study, involving all active US equity mutual funds over the period February 1980 through February 2009 (resulting in 403,577 observations), I show that both return and the chance of beating the market decline with the age of the average fund. Buying and holding the typical active US equity fund is a recipe for underperformance. On the other hand, I show that funds actively placing stock selection bets and enjoying recent return success earn increasingly superior returns and experience an improved likelihood of beating the market as the fund ages. This argues for the importance of being truly active as a fund manager. Manager skill increases with fund age as long as the manager continues to actively place stock bets. The importance of being activ