Ben Johnson, Morningstar Research Services LLC

The Morningstar Active/Passive Barometer is a semiannual report that measures the performance of U.S. active managers against their passive peers within their respective categories. The barometer is unique in the way it measures active managers’ success relative to the actual, net-of-fee performance of passive funds rather than an index, which isn’t investable.

We measure actively managed funds’ success relative to investable passive alternatives in the same category. For example, an active manager in the U.S. large-blend category is measured against a composite of the performance of its index mutual fund and exchange-traded fund peers Vanguard Total Stock Market Index (VTSMX), SPDR S&P 500 ETF (SPY), and so on. Specifi­cally, we calculate the equal- and asset-weighted performance of the cohort of index-tracking (“passive”) options in each category that we examine, and we use that figure as the hurdle that defines success or failure for the active funds in the same category.

4 takeaways about active vs. passive fund management from our year-end 2017 report

1. U.S. stock-pickers’ success rate increased sharply in 2017, as 43% of active managers categorized in one of the nine segments of the Morningstar Style Box^TM both survived and outperformed their average passive peer. In 2016, just 26% of active managers achieved this feat.
2. The turnaround was most pronounced among small-cap managers. In 2016, the combined success rate of active managers in the small blend, small growth, and small value categories was 29%. In 2017, 48% of small-cap managers outstripped their average index-tracking counterparts.
3. Value managers saw some of the most meaningful increases in their short-term success rates. Active stock-pickers in the large-, mid-, and small-cap value categories experienced year-over-year upticks in their trailing one-year success rates of 15.0, 20.2, and 34.2 percentage points, respectively.
4. Active funds in the intermediate-term bond category were the only ones among the dozen categories featured here to experience a decline in their success rate in 2017. Still, 61.4% of active funds in the category survived and outperformed their average passive peers in 2017. Active managers in the category have been rewarded handsomely for assuming credit risk as both investment-grade and below-investment-grade credits have enjoyed a sustained rally. This is evident in their success rates over the trailing one-, three-, five-, and 10-year periods through the end of 2017.

Although 2017 marked a clear near-term improvement in active managers’ success rates, many of their long-term track records leave much to be desired. In general, actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons.

Read takeaways from our midyear report, which shows that success rates among active fund managers tumbled in the first half of 2018.

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Important Disclosure

The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by Morningstar, Inc. or subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission.

Individual index information is provided as a reference only. Each index is unmanaged and is not available for direct investment. Since indexes and/or composition levels may change over time, actual return and risk characteristics may be higher or lower than those discussed. Although Index performance data is gathered from reliable sources, we cannot guarantee its accuracy, completeness or reliability.

This article contains certain forward-looking statements. We use words such as “expects”, “anticipates”, “believes”, “estimates”, “forecasts”, and similar expressions to identify forward looking statements. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason. Past performance does not guarantee future results.