Why Do Active Funds Lag Even With Winning Picks?

Ivanna Hampton: Welcome to Investing Insights. I’m your host, Ivanna Hampton. Picking winning stocks is just part of the battle to beat an index. Active managers make investing moves when opportunities arise or dry up. They also rely on a team of analysts and state-of-the-art tools to help them uncover the next big investment idea. Yet, an in-depth dive into the top 100 largest active US stock funds reveals most active managers earn lower returns than their index. What are the pros’ missteps, and what can everyday investors like you learn from them? Jeff Ptak analyzed years of stock fund data; the managing director of manager research with Morningstar is here to explain what he found. Thanks for being here, Jeff.

Jeff Ptak: Oh, my pleasure.

Hampton: You analyzed the biggest 100 active US stock funds, then you compared these funds to a hypothetical “do-nothing” portfolio. What makes up this portfolio, and what were the rules that you set up for your test?

Ptak: Sure. Thanks so much for having me. Really appreciate it. What I did was I aggregated the holdings of these 100 mutual funds—all of them actively managed, the largest that existed—as of the start of the period, and I measured their performance, assuming they were left untouched until the end of the 12-month horizon, which was until Dec. 31 of the following year, 2025. It’s a before and after of sorts. You have the funds, and we can very readily track their performance, but it wasn’t clear how their holdings had done if they were left untouched. That was really the premise of the research that I did, which I wrote about in a Morningstar article recently.

Hampton: Well, we’re going to have a few charts from your article in this episode. Listeners, check out the show notes to see Jeff’s article and follow along. Everyone, check out this chart. In 2025, the hypothetical do-nothing portfolio beat both its active funds and the index. Why is that, Jeff?

Ptak: Yeah, so it let its winners run, and it let its losers wither, so to speak. Those are the defining attributes of a do-nothing strategy, and it was true of this particular one. Now, we’re talking about fairly minute differences between what was in that do-nothing portfolio when you aggregated all of these funds’ holdings and the actual manager’s holdings themselves. You’re not talking about the do-nothing making these big bets and seeing them pay off in different ways. They tended to be these small differences, but in aggregate, they did pay off, and you saw this do-nothing portfolio. Without being burdened with fees, it slightly outperformed an index that matched up with these 100 active funds. By a more substantial margin, it beat the performance of the actual active funds themselves.

Hampton: Now, you froze the do-nothing strategy with stock holdings of 2024. How did those bets fare during 2025’s strong market, and what were the hits and misses?

Ptak: Yep. They did quite well. I would say, in aggregate—it was just in terms of sheer number of bets, if you will, underweights, overweights—the underweights actually did better on average, but then when you actually took into account the actual dollar effect of those bets, it was the overweights that made the biggest difference. What are the sorts of stocks that we’re talking about that would have paid off for the do-nothing portfolio? Alphabet GOOGL is an example of a stock that the do-nothing held a bit more of than the active managers themselves did; that was profitable because Alphabet did quite well as the market became more enthused about its burgeoning artificial intelligence prospects. Another example is Lam Research LCRX. It was another name that the do-nothing slightly overweighted; it also did quite well in 2025.

On the other side of the ledger, you had some names that it would have been underweight, and these names ended up doing very, very poorly in 2025. That redounded to the do-nothing portfolio’s benefit. Examples of those might be Strategy MSTR and Fiserv FISV. These were names that were downtrodden in 2025, and so owning less of them made a big difference to performance.

Hampton: Now, you expanded the do-nothing portfolio from one year to a full decade to analyze calendar-year returns from 2016 to 2025. This chart shows yearly hypothetical returns versus actual funds and the index. What did you discover in the up and down years?

Ptak: What I found was the do-nothing portfolio was pretty doggone consistent. We had a couple of down years in there, 2018 and 2022, and in both of those years, the do-nothing outperformed the actual active funds that started those periods. It proved itself to be pretty versatile, which is one of the questions that you have when you look at a year like 2025, and it was quite bullish; the market was up. The question becomes, well, maybe this is just a momentum phenomenon, and it wouldn’t fare as well in some of these more turbulent market conditions, but I found otherwise when I extended the study period in the way you described.

Hampton: You took it one step further and examined the hypothetical growth of $10,000 from 2016 to 2025. The do-nothing portfolio, the actual funds, and the index—in the beginning, they closely tracked together, but started to separate. Why is that?

Ptak: I would say that some of those effects that I mentioned before—so you’re overweighting names that prosper, underweighting those that do poorly—those compound over that longer period of time. That expressed itself when we did this sort of more extreme test in which we froze the aggregate holdings of the 100 largest active mutual funds at the beginning of that 10-year period and assumed they were left untouched for the next decade, which is a level of forbearance that most of us can only aspire to. We would want to get in there and fiddle, tinker with the portfolio. In this particular hypothetical, we assumed it was left alone, and it did quite well. It beat not only the actual active funds, but the index itself, which is quite something.

Hampton: It took some willpower not to look for 10 years.

Ptak: Oh yeah, for sure.

Hampton: Let’s get into some of the lessons from your research. How can active managers do better at beating their index?

Ptak: One of the crueler ironies of this study is that it seems that these active managers did a pretty good job of picking stocks. Were it not so, then the do-nothing wouldn’t have fared as well as it did. Where they seemed to struggle was in making trading decisions, buys and sells. As we know, those buys and sells are impounded into their actual results, the actual performance that they report, and the do-nothing outperformed them. The implication is that those buys and sells didn’t do a whole lot of good for shareholders. I think that one of the takeaways here is that managers not only should focus diligently as they always try to be on the fundamental attributes of what it is they choose to own, but also on the impacts of their transacting and whether they would do well to leave things alone, perhaps in a way that an optimizer or other fundamental indicators would suggest they ought to do.

Hampton: The pros struggle with when to buy, sell, or hold. How can everyday investors like us overcome the urge to tweak with our portfolios?

Ptak: I think if you do a very diligent, purposeful job at the outset, picking a set of securities, picking a particular fund, I think that takes care of or obviates the need to go in and tinker. We’ve done other research, some of which I’ve spoken to you and your colleagues about: Mind the Gap, in which we find that the more investors go in and make adjustments, transact in their portfolio, the worse they tend to do on dollar-weighted terms. I wouldn’t say that’s exactly the same as what we did as part of this study, but it rhymes with it. The less we did in this particular case—that’s the do-nothing portfolio—the better we tended to do. We found something similar when it came to measuring and estimating investors’ dollar-weighted returns as part of our Mind the Gap study. The less you do, the more you’re likely to reap by the end.

Hampton: Do less.

Ptak: Do less. Exactly.

Hampton: If you consider index investing a sort of do-nothing strategy, what makes it more dynamic than freezing a stock portfolio’s holdings for a year or more?

Ptak: Yep. The market itself is dynamic, and so it’s a mirror. It’s holding it up to all active investors in aggregate, and those active investors in aggregate are buying, they’re selling. That’s going to manifest itself in the index. There will be changes in composition in the relative weights of names. Also, we know that there are deletions; there are names that fall out. Furthermore, there are companies that are added to indexes because they go public or because they achieve a certain classification, market cap, style, or otherwise. It means that an index isn’t static. Where I think it resembles a do-nothing is in the sort of offsetting of buys and sells; a settling up of a ledger, if you will. You can have an active manager buying here, another manager selling there, but when you net those two out, they might offset. It means that you have a quieter result when it comes to the index, which is where that offsetting takes place and is reflected.

Hampton: What’s the takeaway for investors who have listened to us and they’re probably rethinking their investing habits?

Ptak: There are a few things. I think that we tend to be skeptical, if not dubious, about active investing. I think that one of the interesting takeaways from this study is that active investors, they do appear to be skilled in aggregate, at least judging from these 100 large funds that I was measuring. I think we shouldn’t throw out the baby with the bath water. We want to be studious and diligent when it comes to evaluating active funds, but there is some indication that they do a pretty good job of identifying stocks that are worthy net-net by the end of a horizon. But also, the corollary is that the less we do as investors, the less we transact—and this is true of the pros, including the active funds that I was measuring, and us novice investors, so to speak, or retail investors who are just going about it maybe in a brokerage account—the less we do, probably the better off we are as long as we’re diligent and studious upfront.

Hampton: Jeff, thank you for coming to the table and explaining why it could pay off to do nothing.

Ptak: Yeah, it’s my pleasure. Thank you so much for having me.

Hampton: That wraps up this week’s episode. Thanks for making this show part of your day. A couple of reminders: Give Investing Insights five stars on Apple Podcasts to help others find the work we’re producing for you, and subscribe to Morningstar’s YouTube channel to watch new videos from our team. Thanks to senior video producer Jake Vankersen. I’m Ivanna Hampton, editorial multimedia manager at Morningstar. Take care.