Why Do Fund Managers Underperform the Market?
The average actively managed fund underperforms the market, as we know. But how does the average fund manager squander the performance? Is it by picking the wrong stocks—or by investing in the right stocks, but at the wrong time?
Javier Vidal-García and Marta Vidal set out to answer this by decomposing the returns of over 21,000 actively managed equity funds across 35 countries between 1990 and 2024. To keep the analysis focused, they analyzed only single-country funds, leaving a still-substantial $12 billion in total assets under management.
Their findings are striking.
The primary source of underperformance is not stock picking—but market timing.
In every one of the 35 countries, fund managers, on average, lost performance due to their market timing activities. The drag from timing averaged 0.43% per year.
In contrast, stock selection was neutral to slightly positive overall. Some managers added value through stock picking, others detracted—but the average contribution across all countries was just +0.09% per year.
But that’s not the whole story.
Most mutual funds are benchmarked not to the entire national market, but to a country-specific MSCI index. When the same return decomposition is performed relative to the MSCI benchmarks, the pattern remains.
Market timing is still the consistent cause of underperformance. Stock selection—again—varied from fund to fund and country to country, but on average, it neither significantly helped nor hurt performance relative to the benchmark.
Source:
Vidal-García, J., & Vidal, M. (2025). Mutual Fund Skill: An International Evaluation of Market Timing and Stock Picking. Complutense University of Madrid & European University of Madrid.