We've published a new report. Read takeaways from our latest Active/Passive Barometer.
The Morningstar Active/Passive Barometer is a semiannual report that measures the performance of U.S. active managers against their passive peers within their respective 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 actively managed funds from our report
- Actively managed funds have generally underperformed their passive counterparts, especially over longer time horizons. In addition, we found that failure tended to be positively correlated with fees—that is, higher-cost funds were more likely to underperform or be shuttered or merged away, and lower-cost funds were often likelier to survive and enjoyed greater odds of success. Again, fees matter. We’ve found they are one of the only reliable predictors of success.
- The midyear 2017 installment of our report is the first to include success rates and performance figures for the 15- and 20-year review periods for those categories for which we have sufficient data. This includes 10 of the 12 categories we’ve examined for the 15-year period ended June 30, 2017, and five of the 12 for the trailing 20-year period. In most cases, these longer-term numbers aren’t materially different from the 10-year numbers. The noteworthy exception is the intermediate-term bond category. The 15- and 20-year success rates in this segment are materially lower than what we’ve measured in more recent periods, which have been marked by active managers’ being richly rewarded for taking more credit risk and, of late, less interest-rate risk than their index-tracking peers.
- Active managers’ short-term success rates spiked higher over the 12 months through June 2017. The increases were especially pronounced among value-leaning stock-pickers. This uptick can be attributed to a variety of factors, most having to do with managers getting a lift from investments that aren’t necessarily true to their style.
- Over the year ending June 2017, stocks in foreign developed markets outperformed U.S. stocks, growth beat value, and small caps edged out large caps. These are all generally favorable conditions for active managers that aren’t shy about coloring outside the lines that define their position in the Morningstar Style Box TM .
Business as Usual
While many have heralded this as the beginning of a potential comeback for active managers, the reality of the matter is that it is business as usual. Active managers’ short-term success rates have been and will continue to be noisy. The long-term signal remains clear: Picking good active managers is hard and keeping costs low is paramount.
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