Skip to Content

7 min read

Active Vs. Passive Funds by Investment Category

What are the odds of succeeding with active funds vs. passive funds?

US_Active-Passive_Barometer_Blog-Banner.png

Key Takeaways

  • Long-term success rates were generally higher among active real estate, bond, and small-cap equity funds.

  • Long-term success rates were generally the lowest among active US large-cap strategies.

Active investing strategies often come with higher expenses for manager skills and involvement. Over the past decade, inflows have tilted toward passive funds as investors seek out cost-effective and broad market exposure.

Are active funds worth the premium in fees and expenses?

Based on 2023 data, Morningstar’s investment research assesses the long-term success rates of active funds compared with passive funds. Here are the categories that stood out and the ones that fell short.

For the full breakdown, download the free report.

Do Actively or Passively Managed Funds Attract More Inflows?

In 2024, total assets in US passive strategies surpassed those in active ones for the first time. Recent data reflects a bigger trend.

Passive funds have attracted more inflows than active funds for the past nine years, according to Morningstar fund flow data.

Elsewhere, passive long-term strategies continue to lag. Outside of the United States, passive strategies only make up 26% of assets under management.

How We Created the Active/Passive Barometer

Our researchers used Morningstar’s comprehensive fund data to calculate a category’s success rate, or the percentage of active funds that survived and outperformed a composite of passive funds over time.

Why a composite?

This “benchmark” reflects the net-of-fees performance of investable passive funds. It factors expenses into analysis for a more parallel look at trends in active-fund success.

The report spans nearly 8,338 unique funds with approximately $18 trillion in assets, or about 55% of the US fund market, at the end of 2023.

Active Funds Fell Short of Passive Funds in 2023

In 2023, actively managed mutual funds and ETFs fell short of their passive peers. While notching an improvement over 2022, slightly less than half (47%) of active strategies survived and delivered higher net-of-fees returns than their average passive counterpart.

Actively managed funds’ recent surge did little to change their long-term track record. Less than one out of every four active strategies survived and beat their average passive counterpart over the ten years through December 2023.

One type of active investment strategy generally trails in long-term success rates.

Active large-cap equity funds

The US large-cap market has been particularly challenging for active managers due to its competitiveness and representative indexes. Just 12% of them survived and beat their average passive rival over the decade through December 2023.

Index strategies using alternative weighting schemes likely lowered the hurdle active funds had to clear. For instance, momentum strategies held what worked in 2022 rather than piling into the market-leading “Magnificent Seven” stocks. Likewise, those stocks made up a much smaller portion of equal-weighted portfolios.

Active US large-cap managers fared better in 2023. Their 50% success rate marked a 4-percentage-point increase from 2022.

The negative skew of distributions of excess returns indicates that the penalty for poor manager selection tended to be greater than the reward for choosing a winner.

When Does Active Management Outperform Passive Management?

Don’t declare passive investing the winner yet.

Active fund performance varies across investment categories and periods. In some regions, they remain the dominant approach in assets under management.

Active fixed-income funds

Active bond managers turned in a 53% success rate in 2023, a swift rebound from last year’s 30% figure. Intermediate-core bond funds led the pack with the highest success rate of the category.

Intermediate-core bond funds invest primarily in investment-grade US fixed-income debt with 2–10-year durations. These fund managers tend to take more credit risk than indexed peers. This likely aided active funds in 2023 as markets rewarded credit risk, after hurting them the year prior.

Rolling success rates for surviving active intermediate-core bond funds. Active managers held a 57% success rate, up from 38% in 2022.

Mortality and distribution of 10-year annualized excess returns for surviving active intermediate-core bonds. Although just half of funds survived the full period, 63% of the ones that did succeeded.

Active real estate funds

In less-transparent markets, portfolio managers may have an edge in expertise. Over the decade through 2023, 51% of actively managed real estate funds survived and beat their average passive peer, making it the only category group whose 10-year success ratio exceeded 50%.

Differences in performance between US and ex-US real estate securities cause active managers’ success rates to ebb and flow. Some category funds invest exclusively outside the United States, while others are more global.

Active strategies’ 55% success rate marked a 22-percentage-point gain over 2022, returning to a level more in line with their relatively solid long-term results.

The long tail to the left indicates the potential penalty for picking the wrong active real estate fund.

Active small-cap equity funds

Small-growth territory has been relatively kind to active managers in the long term.

That may be because the small-cap market is less efficiently priced. Active managers may have more opportunities to find mispriced stocks in markets where information is less accessible.

Active small-cap funds have a 41% success rate over the past 10 years, the highest among all US and foreign stock categories. The long right tail in their excess returns distribution indicates that success can sometimes mean winning big.

In 2023, small-cap managers saw their one-year success rates drop to their lowest levels in several years.

The mortality and distribution of 10-year annualized excess returns for surviving active small-growth funds. The long right tail indicates that success can mean winning big.

Cheaper active funds succeed more often

The cheapest active funds succeeded more often than the priciest ones. Over the 10 years through December 2023, over 29% of active funds in the cheapest quintile beat their average passive peer, compared with 18% for those in the priciest quintile.

How to Compare Active vs. Passive Investing in Direct

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 invest in?

Assessing fund activeness

High tracking error and active share don’t guarantee superior performance but do offer one way for active funds to justify their fees. Some active funds closely replicate the asset weightings of an index fund, but at a higher price point.

Divide a fund’s active share or tracking error by its expense ratio and compare it to a custom benchmark or peer group.

This gives you one indicator of the difference between an active fund and its cheaper passive alternatives.

Assessing portfolio manager track record

When evaluating active managers, our researchers consider factors such as the people managing the portfolio, their process, and whether the parent firm aligns its interests with investors.

With interactive research, portfolio managers can perform complex analyses faster than ever.

  • The Portfolio Manager Handbook shows a holistic picture of a portfolio manager’s career, including strategies managed over time and how those strategies performed compared with peers during the manager’s tenure.
  • The Investment Research Assistant helps investors discover features that differentiate a strategy from its peer group and benchmark.
  • U.S. Fund Fee Trends shows trends in the universe of US mutual funds and ETFs.

You might also be interested in...