Why are S&P500 managers so good?

One question I’ve asked over the decades is - How is it that the “fund managers” of the S&P500 can beat almost all other fund managers consistently, and always over the long-term? I still don’t have an answer to that question. We repeatedly see the S&P500 “fund managers” make decisions (like removing AIV and adding TSLA in late 2020) that look bad for years, yet somehow still outperform everyone in the medium-term and the long-term. I wonder if it is simply a function of fees? Has anyone ever calculated mutual fund returns without accounting for fees and then compare that to the S&P500 returns?

I assume you’re being a tad sarcastic.

These days, my largest holding is an S&P 500 fund with 7 basis point fees (actually, I think I read that they recently lowered it to zero).

Paying high fees for actively managed funds is a fools errand.

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Think 401 accounts only.

The average active fund manager will always equal the market portfolio returns over any time period because

Market Portfolio Average Returns = Weighted Average of (Active Portfolio Returns + Passive Portfolio Returns)

This is explained in more detail here (Absolutely no new news here! - #4 by mostlylong) and from Sharpe The Arithmetic of Active Management.

One could then equate a S&P 500 fund with a market portfolio, which is not unreasonable.

If you subtract fund costs (including management fees) from returns, then the average active fund manager must underperform the market portfolio. Thus in order to outperform the market portfolio, an active fund manager must outperform the market to an extent to cover their costs and then some.

The above explains the average fund manager, but not the fund manager who may consistently over or underperform the market portfolio. Perhaps the vast majority of fund managers are average because none really has an information advantage over the market, despite all of the effort (and cost).

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