In fact, the subject of survivorship bias often comes up during debates about active versus passive fund management approaches. Investors who favor passive fund management--in which funds track an index as opposed to having a manager pick specific securities to buy and sell--argue that survivorship bias skews performance comparisons because many underperforming actively managed funds that no longer exist are excluded, making active management's track record appear better than it really is. We won't try to settle that argument here.
But despite being subject to survivorship bias, fund trailing-return rankings and Morningstar Risk ratings are still a useful tool investors can use to compare a fund's performance to that of its surviving peers over time. After all, for investors trying to decide whether to buy, sell, or hold a fund, how that fund ranks relative to its current competition--rather than its performance relative to funds that no longer exist and are no longer available--is usually what matters most.
EDN wrote:What is to settle? Can Morningstar not do basic arithmetic? I think M* loses credibility with these comments. We know passive beats active. We know that the more people who know that, the fewer people will pay M* subscriptions for active mutual fund and stock research and M*'s business will take a serious blow.
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