Does survivorship bias matter?

Private client investors face a challenge when assessing survivorship bias in index-based benchmarks and in peer groups as which are constructed on a Darwinian basis.

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When considering the utility of financial indices, inevitably the issue of survivorship bias will be raised. The argument goes that managers, funds and companies in any given index at its commencement are then subject to the forces of natural selection. The stronger performers remain while weaker players exit the index for one reason or another. By construction (for example in the FTSE 100), by ceasing to exist (through fund closures), or by choosing to no longer participate (such as with voluntary peer groups). The result of this natural selection process is the performance of survivors in any given index is biased upwards and, as the performance lookback period increases, all those remaining in the index end up being above average.


Last month Marks & Spencer was ejected from the FTSE 100 index for the first time. Despite operating over 1,000 stores, employing around 80,000 people and with revenues in excess of £10bn, M&S is no longer one of the top 100 companies listed on the London Stock Exchange measured by market capitalisation. It feels like the end of an era. There are now less than 30 of the original 100 companies still in the FTSE 100 index and not all of them have been included in the index for the whole of that period.

Established in January 1984 with a base level of 1,000, the FTSE 100 Index has risen more than sevenfold over the last 35 years delivering an annualised (capital) return of just under 6per cent per annum. Only those companies that are consistently strong performers can hope to stay in the FTSE 100 – weaker players face ejection by dynamic newcomers and indeed that has been the case with around 375 companies having been included in the composition of the index since inception. Past success is no guarantee of future success.  

For investors in a FTSE 100 exchange traded fund or tracker, describing their investment as passive seems odd. Fewer than one third of the stocks held 35 years ago are still included in the FTSE 100 index. Indeed, had an investor followed a buy and hold strategy, performance would have been significantly lower. It would be more accurate to describe the investment approach as one that is strictly based on Darwinism. 

The rise in the popularity of ETFs and index-tracking strategies reflects, in part, the superiority of a rules-based Darwinian investment strategy over a traditional buy and hold strategy. If a private client or charity is not going to outsource stock selection to a fund manager or a discretionary investment manager, holding an ETF is likely to be a superior strategy to a buy and hold approach. It is also the case that the performance of an index-tracking fund provides a very useful investible benchmark against which the performance of a fund or portfolio can be judged.

If you have a portfolio investing in UK equities, why not use a FTSE 100 tracker as the benchmark against which performance can be judged? There is no doubt the FTSE 100 tracker benefits from the inherent survivorship bias in the construction of the index. That sets a tough target for any investment manager but why pay extra unless that manager can deliver outperformance?

Most private clients have multi-asset class portfolios and so the benchmark based on index trackers would need to be a composite reflecting the neutral asset allocation for that portfolio. Such a composite benchmark will benefit from survivorship bias within the construction of the underlying indices and present a tough but fair target.

Peer Groups

As a complement to a traditional index-based benchmark it is helpful to understand how investors with similar investment profiles and objectives are doing. It is for that reason that the ARC Private Client Indices have been created. The PCI universe comprises circa 200,000 underlying portfolios supplied by around 90 discretionary investment managers who have elected to be data contributors.

Conventional wisdom would suggest it is highly probable there is survivorship bias at the portfolio level because private client investors with poorly performing portfolios are assumed to be more likely to close them down than investors with portfolios performing above expectation. Is this conventional wisdom correct?

The table below illustrates the impact of survivorship bias whereby the ARC Sterling Balanced Asset PCI Index return sits in the third quartile rather than on the 50th percentile. In theory, over longer time periods a PCI index could even end up in the fourth quartile. 

As a result of this phenomenon, investors should evaluate their performance both against the relevant PCI series and the published quartile ranges available free from  That will avoid incorrect conclusions being drawn regarding the quality of relative portfolio performance, particularly over time frames of five years or more.


How should private client investors react to survivorship bias?

  • Survivorship bias exists in both index-based benchmarks and in peer groups as they are constructed on a Darwinian basis.
  • Survivorship bias makes index-based benchmarks tougher to beat
  • Survivorship bias makes peer group averages easier to beat as time periods increase. For the ARC PCI Universe we estimate that the quantum is in the range of 50-75 basis points per year.
  • QuickCheck allows portfolio performance to be placed into peer group context quickly and is available for download free of charge from

For further information:

Graham Harrison, Managing Director, +44 (0) 1481 817777,

A full list of Data Contributors to PCI is available at

QuickCheck is available from both Google Play and the App Store 

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