http://www.savantcapital.com/sbiasstudy/sbiasstudy.pdf
Executive Summary
The mutual fund industry systematically and significantly overstates fund performance in a way that
falsely makes actively managed mutual funds occasionally look competitive with indexes. When the
little-understood âsurvivor biasâ factor is taken into account, actively managed mutual funds in all
nine of the Morningstar Principia® âstyle boxesâ lagged their related indexes from 1995-2004. In all
but one of the 42 narrower Morningstar fund categories, the survivor bias effect worked to inflate fund
returns. The analysis shows that the purging of the weakest funds from the Morningstar database
boosted apparent returns on average by 1.6 percent per year over the 10-year period.
âSurvivor biasâ is a kind of grade inflation for mutual funds that occurs when the funds with the worst
performance are made to disappear from the database while strong performers move forward. The
result: skewed performance numbers that make the remaining active managers look better since poor
performers vanish before they can drag down the overall performance numbers for the indexes.
Very few investors know about survivor bias, but it should be a major concern. For example, over the
10-year period studied, the Mid Blend category returned a whopping cumulative 72 percent less than
Morningstar data would suggest. The Corporate High Quality Fund category demonstrated the least
survivor bias with 0.4% cumulative return difference. The largest evidence of survivor bias exists in
the Aggressive Growth Fund category at 116%.
Executive Summary
The mutual fund industry systematically and significantly overstates fund performance in a way that
falsely makes actively managed mutual funds occasionally look competitive with indexes. When the
little-understood âsurvivor biasâ factor is taken into account, actively managed mutual funds in all
nine of the Morningstar Principia® âstyle boxesâ lagged their related indexes from 1995-2004. In all
but one of the 42 narrower Morningstar fund categories, the survivor bias effect worked to inflate fund
returns. The analysis shows that the purging of the weakest funds from the Morningstar database
boosted apparent returns on average by 1.6 percent per year over the 10-year period.
âSurvivor biasâ is a kind of grade inflation for mutual funds that occurs when the funds with the worst
performance are made to disappear from the database while strong performers move forward. The
result: skewed performance numbers that make the remaining active managers look better since poor
performers vanish before they can drag down the overall performance numbers for the indexes.
Very few investors know about survivor bias, but it should be a major concern. For example, over the
10-year period studied, the Mid Blend category returned a whopping cumulative 72 percent less than
Morningstar data would suggest. The Corporate High Quality Fund category demonstrated the least
survivor bias with 0.4% cumulative return difference. The largest evidence of survivor bias exists in
the Aggressive Growth Fund category at 116%.
