Why Dead Funds Matter
Most fund databases only include currently operating funds. Funds that were liquidated due to poor performance or merged into other funds disappear from the record. The surviving funds naturally show better average performance, creating an upward bias. This survivorship bias makes the fund industry look more skilled than it actually is.
The Magnitude of the Bias
Academic research estimates survivorship bias inflates average fund returns by 0.5-1.5% annually. Over a 10-year period, approximately 40% of US equity funds cease to exist, mostly due to poor performance. Calculating 'average active fund return' using only survivors overstates the typical investor's experience and makes active management appear more competitive against index funds than it truly is.
Using Clean Data
For accurate analysis, seek survivorship-bias-free databases. CRSP (Center for Research in Security Prices) and certain Morningstar datasets include defunct funds. Fund company marketing materials almost always suffer from survivorship bias, presenting only their best-performing products. Independent, third-party data sources that include failures provide the only honest basis for evaluating whether active management adds value.