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Active vs. Passive Fund Management in Europe

5 takeaways from the first European Active/Passive Barometer

Dimitar Boyadzhiev

 

The European Morningstar Active/Passive Barometer is a semiannual report that measures the performance of active versus passively managed funds within their respective Morningstar 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 Europe large-cap blend is measured against a composite of the performance of its index mutual fund and exchange-traded peers. 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.

5 takeaways about active vs. passive fund management from our report

  1. European stock-pickers’ long-term success rates are low. A majority of active managers both survived and outperformed their passive average peer in just two of the 49 categories we examined over the decade through June 2018.
  2. Over the 10 years through June 2018, active managers’ success rate was less than 25% in more than half of the categories surveyed. This includes core-holding categories.
  3. Survivorship rates are positively correlated with odds for success. The biggest driver of active funds’ failure is their inability to survive, which is often a result of lacklustre performance.
  4. Comparing mortality rates between active vs. passive fund management shows that the latter have the better odds of survival over the long term. The contrast is starker over longer lookback periods.
  5. Active fixed-income managers’ success rates have also been low. Over the past decade, less than a fourth have managed to both live and outsmart their average passive peer in 10 of the 12 categories we studied.

Most active managers’ 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.

Please see below for important disclosure. 

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The Morningstar name and logo are registered marks of Morningstar, Inc. Opinions expressed are subject to change without notice. This commentary is for informational purposes only. Advisory and discretionary management services are provided by one or more Morningstar, Inc. subsidiaries, which are authorized in the appropriate jurisdiction to provide such services. For more details, click here. 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. Morningstar has not considered any individual’s circumstances in preparing this information. Before making any investment decision, please consider consulting a financial or tax professional regarding your unique situation and consider the relevant disclosure document.

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