The financial industry employs some of the smartest people on the planet. So why do the vast majority of their funds fail to beat a simple index tracker? Our Head of Client Education Robin Powell asked Larry Swedroe, one of the world's leading authorities on evidence-based investing, to explain why the failure rate for active funds is quite so high and what investors should do instead.
Winning at Wimbledon and winning at your local tennis club require completely opposite strategies. At the top, you win by playing brilliantly. At club level, you win by not losing. Scientist Simon Ramo documented this after studying thousands of amateur matches: most points aren't won by the better player; they're surrendered by the worse one.
Investment analyst Charles Ellis spotted the same dynamic operating infinancial markets. In his landmark 1975 paper,The Loser's Game, he made an argument that has only grown more damning with time: active fund management had become a contest where the surest path to winning was simply refusing to play.
Five decades later, the evidence is even more damning. "The definition of a loser's game is one where the odds of winning are so low that it simply is not prudent to try," says Larry Swedroe, author of more than 20 books on evidence-based investing. "The way to win a loser's game is simply to choose not to play."
For millions of UK investors still paying for active fund management, that advice couldn't be more urgent.
How active funds are failing UK investors
Do active funds beat the market? S&P'sSPIVA Europe Scorecard provides the most comprehensive answer available, and it makes uncomfortable reading.
Over ten years, 82% of UK active equity funds underperformed their benchmark. In the large and mid-cap space, just 12% of managers beat the index over a decade. Roughly one in eight. The other seven charged fees for delivering less than a simple tracker fund would have provided for a fraction of the cost.
Even over a single year, the picture is bleak. In 2024, 72% of UK domestic equity funds lagged their benchmark. Active funds are losing in real time.
The results are worse still for UK investors holding global or US equity funds. More than 94% of UK-domiciled funds in both categories underperformed over ten years. Virtually nobody won.
Small-cap funds offer a sliver of relative optimism: 33% of managers outperformed over a decade. But a one-in-three success rate is still a losing bet, particularly when investors have no reliable way of identifying the winners in advance.
"It doesn't really matter which category you're looking at," says Swedroe. "It could be stocks or bonds, small caps or large caps. Over long periods of time, over 90% of active funds underperform on a risk-adjusted basis."
The critical phrase is "risk-adjusted". Some active funds do beat their benchmark in raw terms. But once you account for the extra risk managers take to chase those returns, the picture deteriorates further. Fees, concentration bets, style drift: it all compounds against the investor.
The numbers are even worse than they look
Those already-dire performance figures for active funds come with a catch. They're too generous.
The problem is survivorship bias. When an active fund performs so badly that investors flee, the fund company typically merges it into a better-performing sibling or shuts it down entirely. Its track record disappears. What remains in the databases is a curated selection of funds that survived, which flatters the industry's overall results.
Research from Dimensional Fund Advisors, covering US equity funds from 1991 to 2020, found that roughly 5% of funds are liquidated or merged every year on average. In 2009, 11.5% disappeared in a single twelve-month stretch. Over a decade or more, the cumulative effect is enormous. Among surviving funds, the median alpha was -7 basis points per month. Bad enough. But when Dimensional included the funds quietly removed from the record, the median dropped to -12 basis points. Survivorship bias roughly doubled the proportion of funds that appeared to earn reliably positive alpha.
It's like a school boasting about its exam results after quietly expelling every pupil who might drag down the average.
"About 7% of all active managers disappear," says Swedroe. "Their performance is so bad that people leave, and then they either merge their assets into another fund and make that original fund's returns disappear. Or, as I like to say, they go to the great mutual fund graveyard in the sky."
When the industry points to its survivors and says using active funds can work, remember what's missing from the picture.
Why investors stick with active funds despite the evidence
If the evidence is so clear, why do millions of investors keep paying for active management? Swedroe points to three deeply human tendencies that cloud our judgment.
The first is overconfidence. "We tend to think we're better than average drivers," he says. "Like 90% of people answer that, when only 50% can be better than average." That harmless self-delusion turns dangerous with money. "If you're overconfident of your investment skills, you're likely to try to pick stocks, time the market, and concentrate your bets." The base rates say roughly one in eight UK large-cap managers beats the index over a decade. But almost nobody believes their own manager is one of the seven who won't.
The second is recency bias. Whatever has performed well recently gets the attention, and the money. "They watch things outperform, they've already missed that," Swedroe explains. "Now because of the outperformance, the valuations have gone way up. They're buying when expected returns are now much lower. And then they panic and sell what has done poorly." Investors buying high and selling low, doing precisely the opposite of what would serve them.
The third mistake is subtler. Investors confuse having information with having an edge. Swedroe puts it bluntly: "You are buying this stock at 30 because you think it's worth 40. If Goldman thought it was worth 40, would they be sitting on their hands watching the ticker at 30? No. It would be at 40, because they would've bought it."
That feeling of insight is an illusion. Strong management, solid products, growing revenues: the market already knows. The price already reflects it. None of this makes investors foolish. These are cognitive patterns that evolved to serve us well in other contexts. In financial markets,they're ruinous.
When markets go nowhere for a decade
Even the world's largest stock markets can deliver poor or negative returns for astonishingly long periods. That's the other reason why active management and single-market concentration are so dangerous.
Swedroe is blunt: "There are three periods of at least 13 years where the S&P 500 underperformed totally riskless US Treasury bonds. 1929 to 1943, that's 15 years. 1966 to 1982, that's 17 years. And 2000 to 2012, 13 years. That's 45 of the last 96 years." Almost half the time. And the US is the success story.
Japanese investors learned this the hardest way. The Nikkei 225 peaked at 38,957 on 29/12/1989. It didn't surpass that level until February 2024, roughly 34 years of zero nominal returns.
"That's why we don't want to concentrate in any one asset," says Swedroe. "Whether it's US stocks or international stocks or anything else."
For UK investors, the implications are direct. Many portfolios carry heavy home bias towards UK equities, or have swung towards US markets after a decade of strong American returns. Both are concentration bets with no compensating reward. An investor who entered the S&P 500 in 2000 didn't achieve a 5% annualised return until approximately 2018. Patience alone isn't a strategy when starting valuations are stretched and exposure is narrow.
Global diversification isn't a luxury. It's the minimum rational response to the historical record.
A smarter way to build a portfolio
So if active fund management is a loser's game, what does a winning strategy look like?
A low-cost total market index fund is the obvious starting point. But Swedroe argues it leaves significant value on the table, because it captures only one source of return: overall market risk, known as beta.
"If you own a total market fund, you have exposure to only one factor," he explains. "People say, Larry, but I own small stocks. Yes, but the large stocks give you negative exposure to the size effect. The value stocks give you exposure to value, but the growth stocks give you exactly offsetting negative exposure. So your net exposure is zero."
Within a total market fund, the factors cancel each other out. Decades of academic research have identified persistent return premiums associated with smaller companies, undervalued stocks and highly profitable firms. To capture those premiums, investors need to deliberately tilt their portfolios towards them.
The practical benefit is powerful. Swedroe illustrates it with simple arithmetic: "If small value stocks got you 14% and the market got you 10, you could own a 50/50 portfolio of small value and bonds. Now you've got exposure to market beta, size, value and bonds, which means a much more diversified and less risky portfolio. A much smoother ride over the long term."
That reframes how risk works in a conventional portfolio. Most investors with a 60/40 stock-bond split assume 60% of their risk sits in equities. The real figure is closer to 85-90%, because stocks are so much more volatile than bonds. Factor tilts offer a way to redistribute that risk more intelligently, capturing historically higher expected returns while holding enough bonds to cushion the worst downturns.
What to do instead
The evidence points toa clear set of practical steps.
Stop paying for active management. The vast majority of active funds destroy value after costs. Switching to low-cost index or systematic funds is the single most impactful change most investors can make.
Diversify globally. Home bias is one of the most common and costly mistakes. No single country's stock market is guaranteed to deliver strong returns over any given decade, and concentrating in one geography is a risk with no compensating reward.
Consider factor tilts. Allocating to small-cap, value and quality stocks has historically improved risk-adjusted returns, grounded in decades of peer-reviewed research.
Keep costs ruthlessly low. Every pound paid in fees is a pound not compounding in your portfolio. Total costs, including platform charges, fund fees and transaction costs, should be scrutinised and minimised.
Work with an evidence-based adviser. A good financial adviser doesn't try to beat the market. They build a disciplined plan around your goals, keep costs down, manage your tax position, and stop you making the behavioural mistakes that erode returns. The adviser's real value lies in what they prevent, not what they predict.
None of this requires special expertise or access to institutional products. It requires a willingness to accept what the evidence shows, and to act on it.
Winning by not playing
The way to win the loser's game is to stop playing it.
Active funds aren't broken because the people running them lack intelligence or effort. It fails because the game itself guarantees that most participants will lose, and costs ensure the majority of the remainder will too. That was Charles Ellis's insight in 1975. Half a century of evidence has only strengthened his case.
Evidence-based investing won't make you rich overnight. It won't generate exciting dinner party stories about the fund manager who spotted the next big thing. But it will put the odds firmly in your favour, quietly and consistently, year after year.
Atrockwealth, ourevidence-based investing approach is built on exactly these principles. No predictions. No star managers. Just portfolios grounded in what the evidence shows.
The amateur tennis player who wins isn't the one attempting spectacular shots. It's the one who keeps the ball in play.
Ready to put the evidence to work for you? If you'd like to talk through your investment approach with one of our advisers,book a free initial consultation. No jargon, no pressure: just an honest conversation about what's likely to work and what isn't.
Resources
Ellis, C. D. (1975).The loser's game. Financial Analysts Journal, 31(4), 19-26.
Ramo, S. (1970).Extraordinary tennis for the ordinary player. Crown Publishers.
S&P Dow Jones Indices. (2025).SPIVA Europe Scorecard. Available at: spglobal.com/spdji/en/spiva/article/spiva-europe
Dimensional Fund Advisors. (2020).Why worry about survivorship bias? Available at dimensional.com.
