When Indexing Works and When It Doesn’t in U.S. Equities:
An Update of the Purity Hypothesis

Abstract

The Purity Hypothesis asserts that indexing tends to beat active management in the top-performing U.S. equity asset classes and tends to lose to active management in the worst-performing U.S. equity categories. Active managers often stray from their size and valuation style boxes, which can help or hurt their performance versus benchmarks. For example, a U.S. equity large growth manager may drift away from the large growth style by holding some midcap stocks. If the large growth style is the best-performing U.S. equity asset category, the manager’s midcap holdings may well erode fund performance. But if large growth is the worstperforming U.S. equity asset class, the manager’s midcap positions will likely lift fund returns.