Why active funds lag: their trading erases their stock picks

Advisors defending an active sleeve in a client portfolio have a sharper answer now to the question of why those funds trail their benchmarks. Morningstar's Jeff Ptak examined the 100 largest active U.S. stock funds and measured them two ways: by what they returned, and by what their own holdings would have returned if no one touched them for a year.

Left untouched for a year, the holdings beat the live funds in nine of the ten years in Ptak's sample. The sample runs through Dec. 31, 2025. The do-nothing portfolio returned 14.3% annually over that decade, almost a full point ahead of the actual returns. In 2025, almost two-thirds of the funds Ptak tracked trailed their index. The frozen portfolio still came out ahead. The live funds paid an average expense ratio of 0.59%, which only made the frozen portfolio's win more decisive.

Ptak pushed the test further. He took the combined holdings of the top 100 funds as of Dec. 31, 2015, and held them for a decade. The portfolio returned 15.2% a year. The funds themselves returned 13.8% a year. The index, over the same stretch, returned 14.9%.

Ptak's findings echo a 2021 study of institutional investors by Klakow Akepanidtaworn, Rick Di Mascio, Alex Imas and Lawrence Schmidt. They found that institutions, no matter how sophisticated, sell fast and buy slowly. Entries came easily; exits were the hard part. The weakness showed up in knowing when to hold and when to leave.

For advisors, the practical lesson is about construction, not fund selection alone. Fees matter, but so does trading behavior: turnover, trim discipline, patience. The cheapest active fund is not automatically the best. The one that trades least may be the one whose return most closely matches its holdings' potential.

This turns the index-versus-active argument around. Managers can pick stocks; the aggregate evidence says they did. The problem is the managing itself — rebalancing, trimming winners, rotating — which burns the edge. A client who asks why a fund lags deserves an answer about the holdings, not the scoreboard.

The open question is whether any active manager can be trusted to hold still. The institutional study suggests the bias runs deep. The Morningstar exercise gives advisors a diagnostic: compare a fund's holdings-based return with its actual return. A wide gap means the manager is trading away the fund's edge.