Investors looking to outperform the market by putting money into actively managed funds must tolerate longer periods of decline than most are prepared to weather in the hunt for return.

More than 80 per cent of outperforming active funds in the US spent at least one five-year period in the bottom 25 per cent of funds for performance, new research from Vanguard shows.

“Over any 10-year window, you should expect an active manager to underperform [in] three or more years,” said Christopher Tidmore, co-author of the study and investment strategist at Vanguard. “What you’re going to experience is more volatile than you think.”

Investors have limited tolerance for underperformance, especially when it is significant, frequent or over long periods. But selling at the bottom crystallises losses, sometimes before an active strategy has had the chance to mature.

“There’s a lot of talk about how much patience you need with the market, but for investors interested in active investing, you need patience not just with the strategy but also with the manager,” Mr Tidmore said.

Just under three-quarters of UK investors’ assets are held in actively managed funds, compared with 26 per cent in passive, according to Morningstar data as of October. In the US, only 59 per cent of investor assets were held in active funds.

All but one active fund underperformed at some point for a three-year period, according to the research, which was based on analysis of around 1,173 US managed funds. It selected those that were currently outperforming, more than 10 years old and operational in the past 25 years. This is about 40 per cent of the US managed funds market.

And though some funds underperform their benchmarks frequently, or for longer stretches of time — others underperform dramatically. More than half of funds — 50 to 60 per cent — underperformed their benchmark by more than 20 per cent, before becoming long-term outperformers.

According to Vanguard, the average annualised return for active funds was about 1 per cent above the benchmark. “We talk in percentages but investors talk in dollars. Over 20 years with compounding, 1 per cent adds up to a lot of money,” Mr Tidmore said. “If you have the patience it can really add up to significant difference in outcomes.”

However, investors’ unwillingness to accept significant periods of underperformance is reinforced by industry marketing. “We tell people that investment is a long-term proposition, but we publish one month, three month, six month performance data on our fact sheets . . . so we contradict ourselves with the message we send to investors,” said Ryan Hughes, head of active portfolios at UK investment platform AJ Bell.

“You should never buy an active manager unless you fully accept they will go through a long period of underperformance . . . It’s not the greatest marketing message, but it’s the reality,” he said.

An abundance of data has given people more ways to dissect performance and more awareness of short-term downturns than they had 30 years ago, when they were notified about their investment performance by letter once a year, or were obliged to consult the financial pages.

“If you have a well-diversified portfolio you want parts of it to underperform because it means at other times they will outperform,” said Emma Wall, investment analyst at Hargreaves Lansdown. “Certain styles go in and out of favour and that’s important for investors to understand.”

The disconnect between reality and expectations of underperformance also affect the managers themselves. “Ninety per cent of institutional asset allocators were looking to replace their managers after two years of underperformance,” Mr Tidmore said.

The study had limitations, he added. “The one thing we did not look at is how much patience should you have — when you should no longer be patient — when should we bail. There was no pattern.”