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

However, the consistent evidence we see in S&P's Annual SPIVA result sheets shows that such periods do not exist as active managers have underperformed in both bull and bear markets (regardless of their ability to move into the money).

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

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

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

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

Investor Takeaway

Although active management can offer both excitement and the possibility of sharp returns in the market, empirical evidence shows that it is a losing game—one that, although it is possible to win, the odds of doing so are so slim that it is not Play carefully.

Larry Swedroe is the author or co-author of 18 books on investing, including his latest, Enrich your future: the keys to a successful investment.