ETF Specialist

Why Do Active Managers Do Better in Some Periods Than Others?

Alex Bryan, CFA
Adam McCullough, CFA

Morningstar's Active/Passive Barometer and other studies have demonstrated that most active managers have struggled to beat their index counterparts over the long term. But active managers have had greater success in some periods than others. A theory known as Dunn's Law suggests that this pattern can be explained by stylistic differences between active and index portfolios (1). The idea is that indexes tend to be more style pure than their active counterparts, so they should be more difficult to beat when the style they represent has strong relative performance. Conversely, they should be easier to beat when their style has weak relative performance.

We conducted a study to put Dunn's theory to the test, using data from the Morningstar Active/Passive Barometer for 12 Morningstar Categories. The study found: