Active vs Passive: US Large Cap Equities

This post will look at US large caps through the lens of the active vs passive debate. As one the largest and best known asset classes, it is often the battleground of the debate.

There is no shortage of analysis and reporting purporting to shed light on the active vs passive debate, although most of it is noise. SPIVA publishes data quarterly, although knowing what percent of managers out/underperformed each quarter or year is meaningless, as is knowing the persistence of top ranked funds (see here). So, we’ll skip all the noise and red herrings and skip right to a good starting point: rolling returns over multiple years.

The below shows that active managers really underperformed in 1990s, then enjoyed a period of outperformance during the recession of the early 2000s, but have not added much value since.

The picture does not change much when we go from 3-year rolling returns to 5-year rolling returns. The median manager added modest value for a brief time in the mid-2000s and again around 2010.

Vanguard put out this beautiful chart of 10-year rolling returns that includes data on all percentiles of active managers (instead of just the mean or median manager). On average, most active managers underperform over most 10-year time periods. Again, this is before taxes, so the real after-tax numbers are even worse for active managers.

There is some evidence that active managers perform better in severe down markets, which you can see in the above charts as well as in the scatter plot below. It’s is debatable whether this is simply due to lower equity allocations or whether active managers are successful risk managers. Distinguishing between those two factors is really just splitting hairs, so I’ll move on and wrap up.


The data largely shows what the passive camp already knows: large cap indices are hard to beat. Over 3-, 5-, and 10-year periods, most active managers underperform most of the time.

However, the active camp will rightfully point out that there have been some time periods when more than half of managers outperform. This is true, although it is a minority of the time and does not include tax drag.

Of course, these numbers are in aggregate. Some managers may pitch themselves with a superior 10-year return and my hope is that readers will respond by saying, “Show me a history of your rolling returns.”

My final conclusion is that outperforming a US large-cap index is very, very difficult to do. It is even more difficult in taxable accounts. I don’t think its impossible and I own an actively-managed US large cap fund at the moment, but investors need a very compelling case because the odds favor passive management.

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