This paper demonstrates that the average investor would be better off by following a readily implementable strategy of investing in a portfolio of the five largest active funds in U.S. equity, fixed income, and international equity asset categories than investing in a corresponding portfolio of passive index funds.

The active-fund-portfolio outperforms not only in terms of average returns, but also in risk-adjusted returns, providing far greater downside risk protection than the passive fund portfolio.

This paper has important implications for investment advisors because its findings question the “wisdom” of index investing, which has been receiving considerable attention in the financial press in recent years.