The Value of a Niche: Where Active Managers Can Win

Amid a constantly changing environment, investment teams must evolve to stay competitive. For those at asset management firms, this growth includes truly understanding how to find attractive opportunities for active investing.

The debate between active and passive strategies isn’t just about long-term averages—it’s about identifying where market structure, liquidity, and investor behavior create openings for skilled active managers to add value.

While passive investing may widely dominate markets, active investing can still outperform its counterpart in certain areas. Active strategies are poised to succeed where inefficiencies remain or are deepening due to macro shifts, regulatory changes, and evolving investor preferences.

By finding the right niche, it can be easier for active managers to boost returns and deliver value.

Here’s a closer look at the investing landscape and top areas to consider.

Total assets in US passive mutual funds and exchange-traded funds, or ETFs, first surpassed those in active ones in 2024—and the gap has continued to widen.

Over the past decade, inflows in the US have tilted toward passive funds with consistent outflows from actively managed strategies and strong inflows into passive vehicles reflecting demand for cost-efficient, broad market exposure.

Over the 12 months through June 2026, actively managed mutual funds and ETFsmade up some ground but still lagged their average passive peer. Just over 40% survived and beat their asset-weighted average passive composite, an increase of 7 percentage points from a year earlier.

Yet improvements were notable in specific market segments. Active small-cap and mid-cap equity managers posted success rates of 49% and 47% while active diversified emerging-markets funds saw success rates climb to 70%, among the highest across categories studied. Meanwhile, active intermediate-core bond managers led the cohort with a 66% success rate.

What can active managers do? By using new vehicle structures and strategic distribution, active managers can gain significant advantages that allow them to better navigate the evolving landscape.

Advanced analytics will also play a key role in managing risk and maximizing alpha generation moving forward. The ability to adapt to new technology can differentiate successful active managers from those struggling to compete.

Having partners who embed artificial intelligence throughout their ecosystem may help create efficiency that leads to better decision making, incremental savings, and operational costs that can be passed onto investors.

Flows are now shifting away from traditional mutual funds. As a result, the ability to deliver actively managed strategies in an exchange-traded fund wrapper may no longer appear optional.

Today’s investors demand lower fees, tax efficiency, and intraday liquidity—advantages ETFs naturally provide.

But the potential edge for active managers is the rise of semi-transparent ETF structures— solutions that allow firms to scale their best strategies without revealing their special sauce. Those who embrace the ETF shift will likely capture the next wave of asset flows while those who hesitate may risk watching their AUM move to competitors who already leverage these vehicles.

What can active managers do? Now more than ever, active managers must explore the opportunities and risks of active ETFs. Incorporating the right active ETFs into their offerings can lead to active managers standing out and delivering better strategies.

Active managers who adapt to emerging inefficiencies can gain an edge—particularly in asset classes where market dislocations, complex pricing mechanisms, and information asymmetries create pricing gaps.

• Emerging markets: This remains a fertile space for active managers, with diversified emerging-markets funds posting a 70% success rate, a 35-percentage point increase from last year. To continue finding success in emerging markets, active managers must manage risk efficiently and utilize their research capabilities to find attractive opportunities.
• Private markets and alternatives: The convergence of public and private investments have asset managers exploring opportunities in private equity and private credit—alternative investments where liquidity limits make traditional passive replication particularly difficult. The increasing tokenization of private assets could also shift how active managers provide access and enhance liquidity solutions.
• Real estate: Active real estate fund success rates rose 36 percentage points to 61% in the 12 months through June 2026, following a rough stretch for active managers a year earlier. Yet, the true opportunity may lie in active managers’ ability to navigate interest rate shifts, debt refinancing risks, and sector-specific dislocations.

What can active managers do? The volume and variety of investable products and securities have skyrocketed, outpacing the industry’s capacity to effectively assess each new vehicle, asset class, and security. Although opportunities exist, they demand equally rigorous data oversight, especially as private markets expand and public offerings converge.

By avoiding poor or fragmented datasets and adding tools that allow for deeper analysis of public and private assets in one place, active managers can make more strategic decisions.

Investors no longer see active and passive as an either-or choice. They expect flexibility, tax efficiency, personalization, and risk management in every allocation decision.

As demand shifts, asset managers must move beyond traditional fund structures and turn to vehicles that balance customization with scale.

Successful firms won’t just adopt these strategies but will differentiate their execution in ways that drive sustained AUM growth.

Here are top investment vehicles to consider:

Given passive investing continues to pressure fees and performance, active managers must rethink how they deliver value. The value of separately managed accounts, or SMAs, isn’t just in tax efficiency—it’s in how asset managers integrate real-time analytics, dynamic factor tilts, and portfolio construction to enhance after-tax alpha.

SMAs offer much-needed precision which enables tax-loss harvesting, direct security selection, and tailored factor tilts that enhance after-tax alpha.

Model portfolios aren’t just about efficiency—they’re becoming a primary distribution strategy. Asset managers who create models tailored to RIA platforms and digital wealth channels are gaining distribution advantages while maintaining investment discretion.

Model portfolios unlock scalability and efficiency, allowing for tactical asset allocation, smart beta overlays, and seamless portfolio adjustments in response to market conditions.

These vehicles not only help investment teams compete, but they enable a more flexible, cost-effective approach to portfolio construction—bridging the gap between customization and scale.

Firms that master these tools and adjust to the evolution of model portfolios will be well-positioned to capture flows and reinforce their value proposition. Most importantly, they can drive better outcomes for investors.

The shift in direct indexing goes further than expansion into new asset classes beyond the large cap space they play today. Instead, the focus is on how asset managers are using this investment vehicle to blend active and passive advantages.

As direct indexing blurs the line between passive and active management, smart beta and thematic overlays (ESG and Factor exposures) are advancing direct index products into highly customizable solutions.

What can active managers do? Partnering with providers that offer data and analytics encompassing extensive risk modeling, style box attribution, rating capabilities, and research across investment vehicles can help investment teams maximize their strategic advantage and craft new portfolios to expand their product lineups.

Active bond funds have been outperforming their passive counterparts. Specifically, active intermediate-core bond managers are leading the pack with a 66% success rate, while active corporate-bond managers’ success rate jumped to 34% from 4% in 2025.

This may not be surprising: Active bond managers can have an edge in today’s fixed-income markets with the support of fundamental research, issuer-level insights, and sector-specific analysis.

But fundamental research isn’t the only difference. With credit spreads widening and economic uncertainty creating dispersion across issuers, access to independent credit ratings and forward-looking analysis has become essential.

What can active managers do? By leveraging our credit analytics tools to assess risk-adjusted opportunities—whether in corporate bonds, municipals, or structured credit—active fund managers can navigate market inefficiencies with greater precision, positioning themselves to sustain their performance advantage.

The firms that win should define where and how their active strategies exploit market inefficiencies. Investors are no longer choosing active versus passive based on ideology—they’re looking for the best possible outcome in regard to their risk tolerance and portfolio.

To stand out in a crowded market, asset managers must demonstrate key traits such as:

• Data-driven product development: Utilize solutions that can break down silos across sales, marketing, product, and portfolio management to bring about an integrated narrative.
• Research-backed investment decisions: Access to objective research and ratings that extend across public, private, and sustainable asset classes to assist in making informed investment choices.
• Enhanced distribution and customization: Seek ecosystems that enable scalable personalization in SMAs, direct indexing, and model portfolios.

Asset managers must also ask themselves important questions, including:

• Are you identifying the right inefficiencies? Investigate further than broad asset class designations. Consider new investment vehicles —look internally and pinpoint the specific edge in extracting value where passive falls short.
• Do you have complete confidence in your data sources? Partner with providers who not only have robust, timely, and accurate data, but objective research that backs it up. These providers should be innovating when it comes to alternative data, AI-driven analytics, and localized intelligence.
• Are you positioning active as a strategic tool? Investors increasingly see active management as a complement to passive allocations rather than an all-or-nothing decision. Make the case for how active fits into broader portfolio construction by clearly communicating with clients.

Active management still thrives—but success depends on more than actively making decisions. The best investment teams will offer a clear, data-backed case for why they win where passive falls short.

Deliver quality offerings with Morningstar Direct. Asset managers can use the comprehensive platform to:

• Find hidden opportunities: Evaluate asset flows and competitive positioning across markets and asset classes with the Asset Flows module.
• Validate investment ideas: Use Portfolio Analysis tools and independent Morningstar research to analyze performance and risk.
• Develop differentiated products: Compare peer strategies across ETFs, SMAs, model portfolios, and more.