The idea that investment returns might be simply a product of chance might ruffle a lot of feathers in the investment business, but is an idea supported by extensive academic research. Many studies have shown that over long periods of time, most equity investment managers underperform relevant indices by about as much as they charge in fees and incur in trading costs . According to Morningstar's figures, neither fund group collectively outperformed its benchmark index during the last ten years, and both groups had higher risk scores. It is true, however, that a greater percentage of funds in these market sectors outperform compared to large, domestic companies. Regardless, there is no consistent means to select the funds which will outperform.
Index funds are the only known way to realize consistent performance in any market.
There are several good reasons to use passive management in less efficient markets, aside from performance. Research costs are considerably higher in these markets, which are reflected by higher expense ratios. Even if active management is capable of adding more value in less efficient markets, they have more costs to account for as well. Index funds only work during bull markets. When the market falls, an investment manager can pull investors' assets out of the holdings.