Why Do Some Mutual Funds Underperform Despite Having Expert Fund Managers?

Why expert fund managers still struggle to consistently beat the market after costs taxes and competition.

Mutual funds are often sold to people with the idea that a good manager can make more money than the market. This idea is not completely wrong. There are expert managers out there and some funds do better than the market over a long period of time. For example Vanguard says that good managers can make a difference and they point to their PRIMECAP Fund as an example of a fund that did better than the S&P 500 over 20 years.

The truth is that being a good manager is not enough. When you add in costs taxes pressure to keep up with the market and changes in the type of investments many expert managers still do not do well.

The Market Is Very Competitive

The main reason for this is that the market is very competitive and it is expensive to try to beat it.

According to Morningstars 2025 Active/Passive Barometer only 21% of funds that try to beat the market actually did so over 10 years.

In 2025 only 38% of these funds did better than the average fund that just tracks the market.

So even before you ask if a manager is good the odds are already against them.

Costs and Fees Reduce Returns

Costs are a major reason why funds do not do well.

The SEC says that investors should think about fees expenses and taxes because they can significantly reduce the amount of money you make over time.

They also say that funds with managers who try to beat the market usually have higher fees and that active trading can lead to higher costs and taxes.

Vanguard also points out that higher costs often mean lower performance and that paying more money does not mean you will make more money.

This matters because a good manager does not start with a clean slate. Before they can prove their skill the fund has to overcome its fees taxes and operating costs.

The SEC says that these costs include paying the manager distributing the fund legal work accounting and other operating expenses.

Investors indirectly pay these costs through the funds assets. So even a good manager can underperform if the funds costs are too high.

Benchmarks Make Performance Harder

Another reason is that managers are not judged on their own. Funds are usually compared to a benchmark and that benchmark has to match the funds investment style.

SPIVA makes this point by comparing funds to category specific benchmarks instead of just comparing them to the whole market.

If a manager invests differently from the benchmark the comparison can look unfair even if the manager made reasonable decisions.

If the managers strategy works the fund looks excellent. If it does not work the fund can suddenly look very weak.

Managers Sometimes Change Their Strategy

Managers can also slowly change their investment strategy over time which is called style drift.

SPIVAs research shows that many funds do not always stick to the same investment style which means the manager may start doing something different from what investors expected.

This can happen because of market pressure or because managers are trying to keep up with competitors.

The result is often a fund that no longer behaves the way investors originally expected.

Survivorship Bias Changes the Picture

There is also the problem of survivorship bias.

SPIVA explains that many funds close or merge because they do not perform well.

If investors only look at the funds that survived they get a distorted picture of how successful active management really is.

The funds that disappeared are still part of the story and including them shows just how difficult it is for managers to consistently beat the market.

Sometimes the Market Environment Is Just Difficult

The market itself can also make it hard for managers to do well.

SPIVAs research shows that even skilled managers can struggle during certain market environments.

For example in 2024 many global and international funds underperformed their benchmarks.

That does not automatically mean the managers were bad. It can simply mean the market conditions were extremely difficult.

Past Performance Does Not Always Predict Future Results

This is why looking at past performance is not always a reliable way to choose a mutual fund.

Vanguard warns investors not to focus too much on short-term performance and instead think about whether success came from skill luck or a market environment that favored the managers strategy.

A manager can look amazing in one market cycle and average in another simply because their investment style happened to work better during one period.

Skill matters but so do timing market conditions and investor behavior.

Even Great Managers Can Become Expensive

Even if a manager is genuinely skilled the fund can still disappoint investors if the fees become too high.

Vanguards research says that even the best managers may not be the best investment if the costs are excessive.

That is an important point because investors do not receive gross returns. They receive returns after all costs are removed.

A great manager can still produce average returns for investors once fees and taxes are included.

Final Thoughts

So why do some mutual funds not do well even with expert managers?

Because being a skilled manager is only one part of the equation.

The final return is affected by fees taxes operating costs benchmark selection market conditions and the fact that many skilled managers are competing against each other in the same market.

The manager may be talented but the fund can still underperform once all the real-world costs and challenges are included.

That is why the best looking mutual fund on paper is not always the best investment in reality.

The bottom line is this: mutual funds with managers who try to beat the market can absolutely do well. But they do not do so consistently enough for most investors to simply assume they will outperform.

The evidence from Morningstar SPIVA the SEC and Vanguard all points to the same conclusion. Skilled managers exist but consistently beating the market especially after costs and taxes is much harder than most people think.