If you watch CNBC or Bloomberg, one of the most common refrains heard from active managers is that we’re in a stock picker’s market, with active managers outperforming.

However, The persistent evidence we see in S&P’s Annual SPIVA Scorecards shows that such periods don’t exist as active managers have underperformed in both bull and bear markets (despite their ability to move to cash).

Given that active managers must overcome the burden of higher expenses, if there ever is a period when they would be likely to outperform, it would be when there is both high volatility (providing market timing opportunities) and low correlation (there is a wide dispersion of returns across individual stocks). Thanks to the research team at Vanguard, we can answer the question of whether such periods actually produce conditions that make it likely active managers will outperform. 

The Vanguard team analyzed the performance of active U.S. equity funds during periods characterized by volatility and dispersion over the 24-year period 2000-2023 to determine whether either of these conditions led to a good time for active management. Volatility was represented by the variance of the Russell 3000 Index’s daily total returns in a month. Dispersion was defined as the market-capitalization-weighted cross-sectional variance of Russell 3000 Index constituent total returns in a month.

• If increased market timing opportunity benefited performance, then the excess return should rise as volatility increased.
• If an increased stock selection opportunity benefits performance, then the excess return should rise as return dispersion increases.

As you can see in the table below, there was no relationship between the monthly excess returns to active managers and either volatility or dispersion. In fact, the worst performance of active managers was in the quintiles of the highest volatility and the highest dispersion of returns—a negative 44 basis points a month—more than 5% a year!

Investor Takeaway

While active management may provide both excitement and the opportunity for market-beating returns, the empirical evidence demonstrates that it is a loser’s game—a game that while it is possible to win, the odds of doing so are so poor that it’s not prudent to play.

Larry Swedroe is the author or co-author of 18 books on investing, including his latest, Enrich Your Future: The Keys to Successful Investing.