Morningstar's Active/Passive Barometer and other studies have demonstrated that most active managers in the U.S. have struggled to beat their index counterparts over the long term. But active managers have had greater success in some periods than others. A theory known as Dunn's Law suggests that this pattern can be explained by stylistic differences between active and index portfolios¹. The idea is that indexes tend to be more style pure than their active counterparts, so they should be more difficult to beat when the style they represent has strong relative performance. Conversely, they should be easier to beat when their style has weak relative performance.

We conducted a study to put Dunn's theory to the test, using data from the Morningstar Active/Passive Barometer for 12 Morningstar Categories. The study found:

• Dunn's Law has some merit, though the results didn't always align with the theory's predictions.
• Although the relationships we examined didn't always match the predictions of Dunn's Law, the returns to various investment styles and risk factors explained much of the variation in the success rates observed from September 2002 through December 2017.
• Active managers' success rates are noisy and tough to predict. Attempting to time exposure between index and active managers is akin to timing just about anything else in the market and not advisable.