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Rekenthaler Report

Where Active Management Succeeds (or Fails)

Dunn's Law suggests the advantage (or weakness) is only temporary.


From the Outside
In the mid-1990s, Steve Dunn, a Los Angeles lawyer and amateur investor, coined what came to be known as Dunn's Law: "When an asset class does well, an index fund in that asset class does even better." That insight earned him more than 15 minutes of fame, as it's been regularly cited by fund writers ever since, ranging from my 1999 Journal of Financial Planning article to, most recently, a blog by author and index-fund investor Rick Ferri. However, the word is far from fully spread.

When index funds first came to the fore, in the 1980s and early 1990s, active managers scoffed. It was a bull market, and index funds are fully invested, so naturally index funds were winning. Any idiot could realize that a cashless fund would outperform when stocks were rising. Without knowing it, those managers were citing a specific application of Dunn's Law: When stocks did well, stock index funds did even better.

John Rekenthaler does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.