It has long been my experience that investors, both individual and institutional, continually seek to “beat the market” by hiring active money managers.

This desire seems remarkably strong and persistent, despite the historical poor odds of actually doing so.

Let’s start with some basic facts. First, at best only half of outcomes for any activity can actually be above-average with the other half being below-average.

For example, half of all drivers are better than average and half are worse — yet when asked, nearly all of us say we’re above average.

Second, investment management involves fees that reduce returns. The higher the fees, the bigger the hurdle for managers to deliver above-average returns.

The good news for investors is that fees have come down dramatically over the years. Morningstar says the industry average asset-weighted mutual fund and exchange traded fund expense ratio is 0.44%, down by more than half from 1.06% in 1996.

But with the industry average expense ratio for passive (index) mutual funds and ETFs today at around 0.10%, that leaves the average expense ratio for actively managed funds at about 0.60%.

Investors can choose to “get the market” less a very small expense fee, or try to “beat the market” by choosing an active fund with hope that the manager can deliver excess returns for the higher fees.

And here, hope springs eternal.

Managers pitch strategies, teams and philosophies, and provide details about past performance. But Securities and Exchange Commission rules require clear disclosure that “past performance does not guarantee future results.” Still investors often ignore this important warning with hope that winning performance will persist.

Let’s explore this:

Morningstar updated its annual Active vs. Passive study last month to look at the odds of success for these two fund approaches. Here are some key takeaways:

• In the United States, just 33% of actively managed mutual funds and ETFs beat their passive counterparts from July 2024-June 2025, a drop of 14% from the prior year. 
• Over the decade ending June 2025, just 21% of actively managed funds survived and beat their average indexed peer.
• Results for U.S. large cap stock funds were particularly poor with just 8% that both survived and beat their average passive rival over the 10 years due to this market’s high transparency and efficiency.
• In Europe, the 10-year success rate for active managers was a bit higher but still just 13.5% for the decade ending June 2025.
• Results for U.S. active bond managers were hit hard in the year ending June 2025, with success rates at 31%. Ten-year results showed 37% of active managers beating index results.

Please note that some actively managed funds do in fact beat the market as the Morningstar study shows.

But the odds are clearly not in your favor as the statistics show, and the problem remains in how to identify tomorrow’s winners.

Past performance persistence is weak; many studies I’ve seen over the years show that top past performers often become tomorrow’s laggards.

The top performing mutual funds based on 10-year returns ending in 2014 were largely in specialized sectors like biotechnology, health care and semiconductors as well as some high-growth U.S. stock funds.

For example, in 2014 the Fidelity Select Biotechnology Portfolio (FBIOX) had a 10-year annualized return of an eye-popping 33.15% — but for the 10-years ending Dec. 31, 2025, had an average annual return of approximately 6.9%, well below its 9.14% benchmark and 12.9% for the S&P500.

Personally, I like the odds in Las Vegas better than trying to pick an actively managed fund that will in fact beat the market.

But they do exist.

Screening for below-average fees can be helpful as the hurdle for outperformance is smaller. And perhaps you or your adviser have some insights into asset-classes, investment styles or sectors that look attractive going forward.

One strategy that seems reasonable for investors who want an active component is a “core-satellite” approach using index funds to provide low-cost exposure to major asset classes as the core of your portfolio with modest “active bets” on sectors or investment styles as “satellite” positions.

Depending on the size of active “satellites,” this should generally deliver market-like risk and return with at least the potential for some excess performance.

But it also has the potential to work against you, too. Odds are against winning, but at least there is a chance.

Finally, keep in mind that asset-allocation (the mix of stocks, bonds, cash, etc.) — not fund selection — is largely the driver of portfolio risk and returns, making it very important to get this right.

The right portfolio for you is one designed to seek your financial goals, considering your time horizon and risk tolerance.

And then, as Warren Buffett has long said, let compounding work its magic.