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Actively vs. Passively Managed Funds Performance

4 key takeaways from Morningstar’s U.S. Active/Passive Barometer 

Ben Johnson, Morningstar Research Services LLC

 

The Morningstar Active/Passive Barometer is a semiannual report that measures the performance of actively 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 U.S. large-blend Morningstar 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.

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4 takeaways about actively vs. passively managed funds from our year-end 2018 report

  1. Just 38% of active U.S. stock funds survived and outperformed their average passive peer in 2018, down from 46% in 2017. Active value funds saw the biggest decline in success, with only 26% of such funds beating the average passive fund in their categories.

  2. Active funds’ success rates fell versus 2017 in 16 of the 20 categories we examined. All told, about 35% of active funds beat the passive composite for their category in 2018. The declines were greatest among active foreign stock funds, which were disproportionately affected by the downdraft in overseas equity markets. Active fixed-income funds’ success rates also dropped amid increasing jitters about credit risk.

  3. In general, actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons; only 24% of all active funds topped their average passive rival over the 10-year period ended December 2018; long-term success rates were generally higher among foreign-stock funds and bond funds and lowest among U.S. large-cap funds.

  4. In a positive note, the data suggests that the average active dollar has outperformed the average active fund; this implies that investors have favored cheaper, higher-quality funds.

Still, 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.

How do these trends apply globally? We share more actively versus passively managed fund trends in our European Active/Passive Barometer.

This blog post is adapted from research that was originally published in Morningstar DirectTM. If you’re a user, you can access the full paper. If not, take a free trial.

Please see below for important disclosure. 

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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.

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