If you have read any of our previous Benzinga articles or blogs over the years you know that my firm, LCM Capital Management, despises mutual funds, particularly those that are actively traded. The reasons are many:  fees, both seen and unseen, taxes which are uncontrollable, fund of funds and right down to what they own inside of them versus what the fund description states it invests in.

We wrote our original Great American Rip-off back in 1998. Sadly, not much has changed in that time period and according to the most recent S&P Indices Versus Active report (SPIVA), 2025 was yet another dismal year for large-cap U.S. equity funds. If you just breathed a sigh of relief or laughed because you had no exposure to any large-cap funds, which I would have a hard time believing, (check your company's retirement plan), I hate to tell you, you haven't escaped the underperformance bug and that includes fixed income funds as well. This is why my firm, in the over 26 years since my partner and I started it, buy individual stocks and bonds for our private wealth clients.

According to the SPIVA report, which you can read here, 79% of active large-cap U.S. equity funds underperformed the S&P 500. This was worse than 2024 when "only" 65% of them underperformed. As most infomercials state, "but wait, there is more." 2025 was the fourth-worst year for active large-cap funds in over 25 years of SPIVA keeping score. Makes one think that maybe mutual funds should be sold via infomercials.

We have written in these pages before and we are sure you have heard that past performance is not indicative of future results and boy oh boy, isn't that the truth. According to the report, over the last five years, only 4.5% of the top-half domestic equity funds that outperformed in 2021 remained in the top-half of performance over the next four years. You might want to read that again. The report isn't saying that these funds out performed their benchmark, it is stating that these funds were only in the top-half of performance over the next four years. That is mind-blowing to us and should be to investors, but wait there's more. For large-cap funds, the report states that active outperformance, when it occurs, tends to be the result of luck rather than skill. Think about that the next time your broker or advisor calls you up and tells you that their fund manager is a skilled stock-picker.

Just so you don't think we are biased and only picking on large-cap funds. When it comes to small-cap funds, only 2% of the top-quartile funds remained in the top quartile over a five-year period.

Active fixed income funds over the same five-year period, that number was only single digits when it came to funds remaining in the top quartile.

My partner and I have each been in this business for over 37 years and we have learned many little secrets within our industry and this is one of them: If a mutual fund stinks and as a result underperforms, my industry just makes it disappear by either merging it into another fund or liquidating the fund. Why this matters is simple, all of a sudden, the number of funds that underperform their benchmarks mysteriously shrinks giving unsuspecting investors the allusion that most actively traded mutual funds outperform. According to the report, and they bolded this not us, over consecutive five-year periods, "in almost every single reported equity and fixed income category, the worst-performing quartile saw the highest proportion of funds that were subsequently merged or liquated." 

This is why my industry likes to bury within their marketing and advertisement that past performance is not indicative of future results, at least they are being forthright about that. Here's a suggestion to them, how about lead with this statement instead of burying it at the end and within their numerous disclaimers?

The thing is, brokers, advisors and financial industry love selling past performance and it's clear to see, they should not be. My partner likes to say that facts are a stubborn thing, and when it comes to actively traded mutual funds and beating their benchmarks, the facts speak for themselves.

"But wait, there is one more thing," some brokers and advisors are starting to move away from actively traded mutual funds, I wonder why (that was me being satirical), and putting their clients into actively traded Exchange Traded Funds (ETF). This is just a wolf in sheep's clothing. Caveat Emptor, let the buyer beware, but I have to hand it to my industry, anything to make a buck.

There is a better way.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.