Active Fund Managers Fail to Deliver

Morningstar announced the Second Half (2009) Box Score Report last week. This report tracks mutual fund manager performance across asset classes. Morningstar notes that, "after accounting for sensitivity to risk, size and style as well as costs, only about a third of active funds in the study had positive alpha over the past three years."

Alpha is a measure of a fund manager’s ability to create excess return relative to a benchmark. Investors are, presumably, willing to pay much higher fees for active funds (compared to index funds), because they expect the manager to beat the index.

Unfortunately, we know that very few fund managers accomplish this. Further, we do not know in advance who these managers will be.