Can You Identify Superior Active Fund Managers? What the Research Shows

Last updated: February 2026

The search for superior active fund managers has consumed more research hours, generated more debate, and disappointed more investors than almost any other question in professional finance. The appeal is obvious: if you could reliably identify managers who will beat their benchmarks, the rewards would be substantial. The difficulty, as decades of evidence now make clear, is that identifying those managers in advance is far harder than it appears after the fact.

The Arithmetic Problem That Won’t Go Away

Before examining what makes some active managers better than others, it helps to understand the mathematical framework that explains why most struggle. William Sharpe, the Nobel laureate who created the Sharpe ratio, articulated the core logic in 1991. Before costs, the return of all investors collectively must equal the market return. For every dollar that outperforms, another dollar must underperform. After costs, the average actively managed dollar must underperform the average passively managed dollar by precisely the amount of costs incurred.

This is not a theory subject to debate. It is arithmetic. The only question is how large the cost differential is and whether some subset of managers can consistently overcome it.

The numbers that follow from this logic are sobering. Long-term studies, including the widely cited SPIVA Scorecard data published by S&P Dow Jones Indices, consistently show that the majority of active managers underperform their benchmarks after fees. While roughly 40 to 50 percent of active managers might beat their benchmark in any single year, the percentage drops substantially as time horizons extend. Over 15-year periods, approximately 90 percent of active large-cap managers underperform. The 2024 SPIVA Scorecard found that not a single equity fund category had a majority of active managers outperforming their benchmarks over a 15-year horizon.

Survival bias makes the picture even worse. Many underperforming funds merge or close entirely, disappearing from the historical record. Studies that account for these “dead” funds show results more discouraging than the already-weak numbers suggest.

The Persistence Problem: Can Past Winners Stay on Top?

The most important question for advisors evaluating active managers is not “Who performed well last year?” but “Will last year’s winners continue to win?” The research on this point is remarkably consistent, and consistently discouraging.

S&P’s SPIVA Persistence Scorecard tracks whether funds that outperform in one period continue to outperform in subsequent periods. The findings are sobering: persistence is weak across most categories and time horizons. Top-quartile funds in one period have little better than random odds of remaining top-quartile in the next period. Earlier research reaching back to the 1990s produced similar results. Bernstein (1999) reviewed the 30 best-performing mutual funds across five different five-year periods and compared their results to the subsequent five years. In each case, the S&P 500 delivered higher returns than all 30 of the previous period’s best performers.

This pattern has held through multiple decades and market regimes. Short-term performance is noisy: at a one-year horizon, results vary considerably by category, with some showing majority active outperformance. But as the time horizon extends, outperformance rates decline consistently. The signal that emerges from long-term data is that past performance is a poor predictor of future results, not merely in a regulatory-disclaimer sense, but in a statistically verifiable one.

Why does performance fail to persist? Several forces work against it. Costs create a continuous drag that compounds over time. Successful strategies attract capital inflows, which dilute returns (a nimble small-cap manager becomes far less nimble when managing ten times the assets). Markets are intensely competitive, with professional investors analyzing the same information, meaning that for one to gain an advantage, another must make a mistake. And strategies that exploit temporary inefficiencies may stop working once the inefficiency is recognized and arbitraged away.

Where Active Managers Have Better Odds

Despite the overall evidence, the case for active management is not entirely closed. Certain market segments provide more opportunity for skilled managers to add value, precisely because those segments are less efficient.

Small-cap stocks receive less analyst coverage, creating potential information advantages for managers conducting original research. The percentage of active small-cap managers who beat their benchmarks, while still below 50 percent over long periods, exceeds the rate for large-cap managers. Over 15-year periods, approximately 85 percent of active small-cap managers underperform, compared to roughly 90 percent in large-cap categories. The gap is modest, but it reflects a real structural difference.

International and emerging markets offer similar dynamics. Information barriers, time zone differences, and variations in accounting standards create inefficiencies that local managers may exploit more effectively than foreign competitors. High-yield bonds reward credit analysis and issuer-specific research in ways that investment-grade bond markets generally do not. Specialty strategies (distressed debt, convertible arbitrage, certain real estate segments) may require expertise that creates genuine differentiation.

The common thread is market efficiency, or more precisely, its absence. The efficient market hypothesis operates on a spectrum. Large-cap U.S. equities, scrutinized by thousands of analysts parsing every earnings release, sit near the efficient end. A micro-cap company with no analyst coverage sits closer to the other end. A thoughtful approach to active management recognizes these differences rather than treating all markets identically.

What to Look For: A Modern Framework for Manager Evaluation

If active management can succeed in certain segments, the question becomes how to identify skilled managers in advance. Early research (including studies from the 1990s examining Morningstar Managers of the Year) suggested that traits like manager education, above-average tenure, patience, low portfolio turnover, and a focus on undervalued securities correlated with superior performance. Other studies found that managers with advanced business degrees added modestly to returns, that younger managers outperformed their older peers, and that concentrated portfolios with below-average expenses showed stronger results.

Those findings remain directionally interesting, but the modern practitioner framework has evolved beyond simple trait lists. Morningstar’s qualitative evaluation methodology, widely adopted across the advisory industry, organizes manager assessment around three pillars: People, Process, and Parent.

People. Who manages the fund? Start with the lead portfolio manager, but do not stop there. Investment decisions increasingly involve teams, and understanding team dynamics matters. Manager tenure indicates experience with this specific fund, and research shows a mixed but slightly positive relationship between tenure and performance. Long tenure provides a track record to evaluate; short tenure raises questions about continuity with historical results. Perhaps more important than tenure alone is succession planning. A fund with a 20-year manager faces a succession event eventually. Understanding whether the organization has prepared for that transition is critical to forward-looking evaluation.

Process. How does the fund make investment decisions? A repeatable, systematic process is more likely to deliver consistent results than ad hoc decision-making. An articulated investment philosophy, a clear security selection methodology, and consistency in approach over time all build confidence. Funds that change their approach frequently may be chasing what is working rather than following a disciplined methodology. Style drift (when a fund’s actual investments diverge from its stated category) is one of the clearest warning signs that process discipline has broken down.

Parent. Who owns the fund company, and how does that ownership affect fund investors? Organizational culture shapes priorities: some fund companies prioritize investment excellence, while others prioritize distribution and asset gathering. Stewardship practices reveal whether the company acts in shareholders’ interests. Does the organization close funds that reach capacity, or let them bloat? Does it vote proxies in shareholder interests?

What Separates Fund Characteristics That Matter from Those That Do Not

Beyond manager traits, certain fund-level characteristics have shown more durable relationships with future performance than raw past returns.

Expense ratios stand out as the single most reliable predictor of relative performance. This is a direct consequence of the arithmetic of active management: a manager charging 50 basis points faces a substantially lower hurdle than one charging 150 basis points. The cost advantage compounds over time, making low-cost funds systematically more likely to outperform high-cost peers.

Fund size has an ambiguous but important relationship with performance. Smaller funds can more readily implement capacity-constrained strategies and trade without moving markets. As assets grow, these advantages erode. A small-cap fund that was nimble at $500 million in assets may lose its edge entirely at $5 billion.

Tax efficiency (which reflects a combination of turnover, holding period, and capital gain distribution patterns), portfolio concentration (fewer holdings generally implies higher conviction), and below-average portfolio turnover (indicating patience rather than reactivity) have all shown associations with stronger results in various studies. But none of these characteristics, individually or collectively, reliably identify future winners. They improve the odds at the margins while leaving the fundamental persistence problem intact.

The Warren Buffett Observation

Warren Buffett famously argued that “diversification is a protection against ignorance,” noting that investors who understand what they own should concentrate to build wealth and diversify only to preserve it. He also advocated long holding periods, describing inactivity as “intelligent behavior.”

For professional fund evaluation, Buffett’s observation cuts in two directions. It accurately describes why concentrated, low-turnover, conviction-driven portfolios can outperform when the manager is in fact skilled. Studies of manager characteristics consistently find that concentration and patience are traits of top performers. But it also highlights the identification problem that makes the search for superior managers so difficult. The concentrated bet that produces outsized returns when the manager is right produces outsized losses when the manager is wrong. Identifying which managers actually possess the skill that justifies concentration, rather than simply the confidence to attempt it, remains the central challenge.

Practical Implications for Advisors

The research on superior active fund management does not lead to a simple “use active” or “use passive” conclusion. It leads to a more precise set of decisions.

In highly efficient market segments (U.S. large-cap equities, investment-grade bonds), the evidence against active management is overwhelming. The cost hurdle is too high and the competition too fierce for most managers to overcome consistently. Passive strategies are the default unless the advisor has a compelling, specific reason to deviate.

In less efficient segments (small-cap, international, emerging markets, high-yield, specialty strategies), the evidence allows more room for skilled active managers. Here, the framework for manager evaluation becomes critical. Advisors should look for consistent process over consistent returns, appropriate fund size, significant manager investment alongside shareholders, and reasonable fees. Morningstar’s analyst ratings (Gold, Silver, Bronze, Neutral, Negative), which incorporate forward-looking qualitative assessment of People, Process, and Parent, provide a useful supplement to the backward-looking star ratings that measure only historical risk-adjusted returns.

Even in segments where active management has better odds, the majority of active managers still underperform. The opportunity is relative, not absolute. Selecting active managers means accepting that you are trying to identify the minority who will overcome the arithmetic, and doing so requires analytical rigor that goes well beyond choosing last year’s top performer.

The Advisor’s Edge

The data on active management performance is publicly available. Any investor can look up the SPIVA Scorecard, read the persistence research, or compare expense ratios across fund categories. What separates informed professional advice from raw data is the ability to evaluate where active management has a reasonable chance of adding value and where it does not, to assess fund managers using frameworks that go beyond past returns, to distinguish between skill and luck in short-term performance records, and to construct portfolios that blend active and passive strategies based on the evidence for each market segment. These are the analytical skills that the Certified Fund Specialist (CFS) designation develops across its two-module curriculum. For advisors looking to explore the data behind the active versus passive debate in more detail, the SPIVA Scorecard Results: How Active Managers Performed article provides the current performance data underlying the research discussed here.

Sources and Notes: Performance data references draw from S&P Dow Jones Indices SPIVA Scorecard reports and SPIVA Persistence Scorecard reports, which provide the most comprehensive ongoing measurement of active manager performance and persistence. The Bernstein (1999) performance consistency analysis, while now historical, illustrates a pattern that subsequent SPIVA data has consistently confirmed. Manager evaluation frameworks reference Morningstar’s Analyst Rating methodology (People, Process, Parent). Earlier studies on manager characteristics referenced in this article include Chevalier and Ellison (1999), Bryant (2000), Arnott (1993), and Odelbo (1995), whose directional findings on traits like education, tenure, and concentration have been incorporated into modern evaluation frameworks. This article is refreshed every 18 months or when major methodology changes occur in the referenced data sources.