Active Vs. Passive Investing: How Active and Passive Portfolio Management Performed in China and Europe

The latest Morningstar Active/Passive Barometer reports for China and Europe show that active managers are still finding it difficult to beat their passive peers. Performance varied across regions and asset classes, but the long-term odds remained against active funds. 

For the full breakdown, download the mid-year 2025 European, China, and US Active/Passive Barometer reports. 

Active management involves fund managers making specific investment decisions, including stock-picking, market timing, and asset allocation, primarily aiming to outperform a particular benchmark or market index. The objective is to generate “alpha,” representing returns beyond what the market generally offers.  

Passive management, often referred to as index investing, seeks to replicate the performance of a specific market index. These funds typically invest in the same securities and proportions as their chosen benchmark, aiming to match its returns rather than surpassing them. 

China’s equity market rebounded in 2024 after a difficult stretch, but active managers struggled to keep pace with large passive products. 

Among stock-heavy funds, only 13.4% outperformed passive peers, a sharp decline from the previous year. Actively managed large-growth funds fared the worst, just 9.7% beating the average passive return. These funds were hurt by underweights in technology sectors that powered index trackers higher. 

Small- and mid-cap active managers performed better, with 38.2% outperforming. Over five- and 10-year periods, small- and mid-cap funds also posted stronger success rates than their large-cap counterparts. 

Sector funds told a mixed story. Active consumer funds led the way, nearly 69.9% outperforming passive peers in 2024. Active healthcare funds saw their one-year success rate fall to 58.9% from 74.4% in 2023.  

Active funds in the technology and communications sector were hit hardest. Success rates dropped from 45.5% in 2023 to just 19.8% in 2024. Passive funds with heavy semiconductor and Star Market exposure captured the upside, leaving most active managers trailing behind.  

Across 38 equity categories, active managers’ weighted average one-year success rate stood at 29.0% in June 2025, almost unchanged from 28.8% at the end of 2024. 

The UK large-cap category stood out as a relative bright spot, with 46.5% of active managers outperforming in the past year, up from 42.1% a year earlier. Long-term, though, success drops to 11.0% over 10 years. 

Global government bond managers thrived: the one-year success rate of 69.8% in June was up from 52.0% a year ago, as they likely exploited relative value trades to realign the geographical exposure away from the US dollar.

European stocks benefited from investors shifting away from US dollar assets. This was further supported by local factors, particularly plans to increase defense spending, which led to looser borrowing limits in Germany.

While active fund managers in the Eurozone saw a short-term increase in success, their long-term performance was poor, with only 4.7% of them outperforming their benchmark over a 10-year period. This highlights the long-term advantage of passive investment strategies due to lower fees.

Morningstar data shows a clear link between lower fees and higher odds of outperformance. Lower-cost funds tend to give investors better odds of success because less return is lost to fees. While market conditions can create short-term opportunities for active managers, over longer horizons, higher fees consistently erode their advantage, tilting the odds heavily in favor of passive funds. 

Active management tends to outperform passive strategies in less efficient markets, where skilled managers can capitalize on mispriced assets. This is particularly evident in the China small- and mid-cap equity space, where active managers have a strong track record of long-term outperformance. 

Active management also proves effective in specific sectors like European bonds, especially during periods of high market volatility or when passive benchmarks are heavily concentrated. Overall, active managers add the most value by navigating markets that are not easily tracked by indexes. 

Choosing the right mix depends on: 

• Goals and time horizon: Long-term investors may prefer low-cost passive core holdings, supplemented by active strategies in targeted areas. 

• Market conditions: Volatile or less efficient markets may offer more opportunities for active managers. 

• Risk tolerance and costs: Higher fees require higher conviction in active manager skill. 

• Category-specific data: Using the Barometer to identify where active managers have historically added value. 

The Morningstar Active/Passive Barometer takes a unique approach to measuring manager success. Instead of comparing active funds to a costless index, it evaluates them against a composite of actual passive funds available to investors. 

The methodology accounts for fees, survivorship, and how the average unit of currency invested performed relative to passive peers.  

The Active/Passive Barometer helps investors calibrate the odds of succeeding with active funds in different categories. 

From there, how do you pick the winners to buy? 

When selecting active funds, it's crucial to look beyond returns. Morningstar Direct contains key metrics for evaluating a fund's genuine activeness, such as: 

• Active Share: Measures the percentage of a fund's holdings that differ from its benchmark index. A high active share indicates the fund is truly distinct from its index. 

• Tracking Error: Quantifies how much a fund's returns deviate from its benchmark over time. Higher tracking error suggests a more active investment approach. 

High tracking error and active share do not guarantee outperformance but can help justify a fund's fees.  

To assess value and potential for success, consider these additional factors: 

• Morningstar People Pillar: This qualitative rating evaluates the individuals managing a strategy. It assesses the skill, experience, and stability of the portfolio managers and their teams, providing insight into their ability to execute the investment process effectively. 

• Morningstar Process Pillar: This pillar evaluates the quality of the fund's investment strategy itself, including its robustness, repeatability, and consistency. 

By combining these quantitative and qualitative measures, you can move beyond simple performance data to identify active funds with a higher likelihood of long-term success.