Ben Johnson 

We've published a new report. Read takeaways from our year-end 2018 Active/Passive Barometer. 

The Morningstar Active/Passive Barometer is a semiannual report that measures the performance of active vs. 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 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.

4 takeaways about active vs. passively managed funds from our midyear report

1. The one-year success rate among active U.S. stock-pickers declined relative to year-end 2017. Just 36% of active managers categorized in one of the nine segments of the Morningstar Style Box^TM both survived and outperformed their average passive peer over the 12 months through June 2018. In 2017, 43% of active managers achieved this feat.
2. When compared with midyear 2017 figures, active funds’ success rates dropped in 15 of the 19 categories we examined.
3. Active funds in the intermediate-term bond category continued to stand out. Though their one-year success rate declined, more than 70% of them both lived and beat their average passive peer during the year that ended in June. Active managers in the category have been rewarded handsomely for assuming credit risk as both investment-grade and below-investment-grade credits have enjoyed a sustained rally. This is evident in their success rates over the trailing one-, three-, five-, and 10-year periods.
4. Stylistic headwinds and tailwinds explain some of the fluctuations in active-fund success. Also, active managers tend to have difficulty keeping up with index funds in strong markets, as many will keep cash on hand to make opportunistic investments or meet redemptions. The resulting cash drag can weigh on their performance. The ebb and flow of active managers’ beat rates tends to be very noisy over short time horizons. We recently studied the factors that explain fluctuations in active managers’ success rates in our paper “Putting Dunn’s Law to the Test.”

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.

This blog post is adapted from research that was originally published in Morningstar Direct^TM. 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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