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4 Takeaways from the Mid-Year 2017 Active/Passive Barometer

Morningstar's review of the performance of actively managed funds

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

  1. 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.
  2. 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.
  3. 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.
  4. 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.

Please see below for important disclosure.

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The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by Morningstar, Inc. or subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission.

Individual index information is provided as a reference only. Each index is unmanaged and is not available for direct investment. Since indexes and/or composition levels may change over time, actual return and risk characteristics may be higher or lower than those discussed. Although Index performance data is gathered from reliable sources, we cannot guarantee its accuracy, completeness or reliability.

This article contains certain forward-looking statements. We use words such as “expects”, “anticipates”, “believes”, “estimates”, “forecasts”, and similar expressions to identify forward looking statements. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason. Past performance does not guarantee future results.