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Active vs. Passive Fund Management in Europe

European active fund managers struggle to deliver over the long term

Dimitar Boyadzhiev

 

The European Morningstar Active/Passive Barometer is a semi-annual report that measures the performance of active versus passive fund management 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 category is measured against a composite of the performances of its index mutual fund and exchange-traded peers—iShares STOXX Europe 600, Vanguard FTSE Developed Europe, 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.

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 average passive peer in just three of the 49 categories we examined over the decade through December 2018.
  2. Active managers’ success rates were less than 25% in two thirds of the surveyed categories over the 10 years through December 2018. This includes most core-holding categories except emerging markets, where the success rate has been a little higher.
  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 and passive funds shows that the latter have the better odds of survival over the long term. The contrast is starker over longer look-back 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 nine 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.

How do these trends apply globally? We share more active versus passive fund management trends in our U.S. 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 paperIf not, take a free trial.

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