Morningstar explores how long even skilled active managers can lag their benchmark and still ultimately outperform, challenging the way investors evaluate fund performance. The paper shows that “good” funds can underperform for nearly a decade, while weaker funds often look strong for years, creating a misleading signal that fuels performance chasing.
How Long Can a Good Fund Underperform Its Benchmark?
Morningstar
Paul Kaplan, Maciej Kowara
Research
20 Pages
Key Takeaways
Long Underperformance Cycles: Funds that outperform over 15 years can still lag benchmarks for 9–12 years, highlighting how extended droughts are often part of successful long-term outcomes.
Misleading Short-Term Signals: A fund can outperform for 8+ consecutive years yet still underperform over a full cycle, showing how 3–5 year evaluation windows can distort true manager skill.
Behavioral Timing Risk: Investors switching after 5 years of lag risk missing the handful of outsized years that drive returns, often turning a potential winner into realized underperformance.
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