“Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth.” Marcus Aurelius, Meditations

arvy's Teaser: The widely quoted “90% underperformance” statistic tells only half the story. Passive investing delivers efficient market exposure — but true alpha is created elsewhere: in quality-focused, high-conviction active management, especially during downturns and sideways markets.

Active vs Passive: It’s Not Either-Or

This article explains why active and passive strategies work best together, how to identify genuine active skill, and why quality, momentum, and high active share matter more than ever.

Beyond the 90% Myth of Active Management

Few statements in investing are repeated as often — and as confidently — as this one:
“90% of active managers underperform their benchmark.”

For many investors, that sentence alone is enough to conclude that passive investing is the only rational choice. Low costs, simplicity, and transparency make index investing highly attractive.

Yet, like most compelling soundbites, this statistic hides more than it reveals. It combines very different managers, strategies, market regimes, and incentive structures into a single number. It ignores why underperformance occurs, where it occurs, and when it is most likely.

Most importantly, it distracts from the real question investors should be asking:

When does active management add value — and how can investors identify it?

The Rise of Passive Investing — and the Problem with the 90% Statistic

At face value, the statistic that roughly 90% of active equity managers underperform their index over a ten-year horizon is broadly correct. Numerous studies confirm it. But context matters.

A Decade Shaped by Market Concentration and Cheap Money

The last 10–15 years — particularly in US equities — were anything but normal. Market performance was driven by three powerful forces:

• Extreme market concentration: A small number of mega-cap stocks generated a disproportionate share of index returns.
• Ultra-low interest rates and abundant liquidity: Cheap money rewarded long-duration growth assets and punished valuation discipline.
• Momentum-driven index construction: Capital flowed automatically into winners, reinforcing their dominance.

In such an environment, owning the index — especially the S&P 500 — effectively meant making a highly concentrated bet on a handful of stocks. Many active managers underperformed not due to lack of skill, but because they refused to own these stocks at any price.

This is not an argument against passive investing.
It is an argument against assuming that this market regime is permanent.

Chart 1: With increased market concentration, you are not buying a) diversification but b) significant, one-sided risk (tech, AI, high valuations).

Where Active Alpha Is Really Generated: Downturns and Sideways Markets

One of the most overlooked aspects of active investing is when alpha is generated.

Contrary to popular belief, high-quality active managers do not necessarily outperform most during strong bull markets. In those phases, beta dominates, market dispersion is low, and passive strategies naturally shine.

Why Quality-Focused Active Managers Matter

Active managers with a quality-oriented approach tend to generate their value in very different environments:

• Market downturns
• Volatile or sideways markets
• Periods of tightening liquidity or rising uncertainty

In these regimes, the ability to lose less becomes far more important than the ability to gain more.

This is where downside capture and capital preservation matter. Quality-focused active managers typically:

• Avoid highly leveraged or structurally fragile balance sheets
• Reduce exposure to deteriorating fundamentals early
• Benefit from momentum signals that warn of trend breaks

Empirical studies consistently show that portfolios combining passive beta with selective, high-quality active managers exhibit:

• Lower drawdowns
• Faster recovery after stress periods
• Improved long-term risk-adjusted returns

In short, active management stabilizes portfolios, while passive investing delivers efficient market exposure — a key reason why a balanced approach makes sense for long-term investors.

The Real Culprit Behind Underperformance: Closet Indexing and Career Risk

To understand why so many active funds disappoint, it is essential to separate true active management from its most common imitation: closet indexing.

What Is Closet Indexing?

Closet indexers are funds that:

• Deviate only marginally from their benchmark
• Charge active fees for index-like portfolios
• Are designed to minimize career risk rather than maximize long-term returns

These products are particularly common among:

• Large banks and universal financial institutions
• Distribution-driven fund platforms
• Benchmark-constrained mandates

The incentive structure is clear: underperforming with the index is safer than underperforming against it. The result is benchmark-hugging portfolios that dilute conviction and guarantee mediocrity.

The issue is not that active management doesn’t work — it’s that many funds are not meaningfully active.

If you pay active fees, you should demand active decisions.

Active Share and Holding Period: Where True Skill Shows

Two metrics are critical for identifying genuine active management:

1. Active Share
2. Holding Period / Portfolio Stability

Chart 2: Active Share and Holding Period Matter

Research by Martijn Cremers and Ankur Pareek demonstrates a clear insight:
Managers with high active share and long holding periods significantly outperform.

The best-performing group is not simply “active,” but characterized by:

• High active share (≥ 80%)
• Low turnover and a long-term ownership mindset

These managers run concentrated portfolios, accept periods of relative underperformance, and allow investment theses to play out over time.

Managers with low active share and short holding periods, by contrast, tend to underperform — often even passive alternatives after fees.

Thematic Funds: Great Stories, Poor Longevity

Another major contributor to disappointing active returns is the proliferation of thematic funds.

Typical characteristics include:

• Narrative-driven concepts (AI, robotics, clean energy, blockchain)
• Launches following strong historical performance
• Aggressive marketing with compelling stories

The issue is rarely the theme itself, but the valuation at entry. By the time investors gain access, expectations are often fully priced in.

Empirical evidence shows that most thematic funds:

• Experience sharp inflows near market peaks
• Underperform broad markets over full cycles
• Are closed or merged within approximately 15 years

These products are built for distribution, not for long-term capital compounding.

Fixed Income: Where Active Management Truly Shines

While equities dominate the debate about active versus passive investment forms, active management is particularly useful for fixed-income investments - and this is where the “good story & good chart” philosophy comes into its own, as you will soon discover when we introduce you to our partner for fixed-income investments, Flossbach von Storch (FvS), which we use for allocation in fixed-income investments.

Structural Weaknesses of Bond Indices

Bond indices suffer from inherent flaws:

• Higher weight to the most indebted issuers
• Insensitivity to deteriorating fundamentals
• No active management of duration, liquidity, or downside risk

In fixed income, quality is non-negotiable. Avoiding permanent capital loss matters far more than capturing marginal upside.

At the same time, momentum matters. Credit spreads, yield curves, and market technicals often move in persistent trends driven by liquidity and policy expectations.

Chart 3: Equity and Fixed Income Underperformance Statistics

Headline statistics still show average underperformance — but once again, the issue lies not with active management itself, but with how it is implemented.

Here is arvy's fixed income braket performance over the last ten years vs what you get investing passively.

Chart 4: Active Fixed Income in Practice — FvS vs Bloomberg Global Aggregate CHF

This comparison illustrates what happens when:

• Quality-driven issuer selection (Good Story)
• Momentum-aware positioning (Good Chart)
• High active share and flexibility

are combined in a disciplined framework.

The result is better downside protection, more adaptive risk management, and superior long-term risk-adjusted returns.

Quality and Momentum: The Only Two Factors That Endure

Across market regimes, research and practice consistently show that only two factors have proven durable over the long run: quality and momentum.

At arvy.ch, these principles form the core of our investment philosophy:

Good Story & Good Chart

• Good Story (Quality): Strong balance sheets, sustainable cash flows, disciplined capital allocation, and resilient business models.
• Good Chart (Momentum): Markets aggregate information over time; trends tend to persist until fundamentals or liquidity change.

Indices cannot actively apply these factors. They are backward-looking, mechanically weighted, and blind to quality deterioration or momentum shifts.

This is precisely where high-conviction active management earns its place.

Chart 5: Quality and momentum outperform all other factors

Active and Passive Investing: Complements, Not Competitors

Active investing should not replace passive investing — and vice versa.

Passive Strategies Are Ideal For:

• Cost-efficient market exposure
• Highly liquid and efficient markets
• Core beta allocation

Active Strategies Add Value When:

• Active share is meaningfully high (≥ 80%)
• Holding periods are long
• The strategy is clear and repeatable
• Incentives are aligned with investors

In practice, this often means:

• Independent or boutique managers
• Owner-operated investment teams
• No bank balance-sheet products
• Willingness to look different from the benchmark

Our Equity Approach: Quality, Momentum, and Conviction

The Good Story & Good Chart philosophy also defines our equity strategy.

Rather than holding hundreds of stocks to resemble an index, we focus on:

• High-quality companies with durable competitive advantages
• Positive momentum confirming fundamental strength
• High active share (≥ 80%)
• A concentrated portfolio of around 30 holdings
• A long-term investment horizon at the strategy level

Concentration is not a risk when it results from deep conviction and disciplined risk management. It is often the only way to achieve meaningful outperformance after costs.

Takeaway: Choose Conviction Over Convenience

The real debate is not active versus passive — it is authentic active management versus disguised passive investing.

Passive investing remains a powerful tool. But when combined with carefully selected, high-quality active managers, it becomes even more effective.

Investors should be cautious of:

• Active fees without real active share
• Benchmark-hugging bank products
• Short-lived, narrative-driven thematic funds

And more open to:

• Quality- and momentum-driven strategies
• High-conviction portfolios
• Long-term investment horizons
• Boutique, owner-operated managers with aligned incentives

The key driver of long-term investment success is simple: How long your money stays invested — not when you invest it.