Morningstar’s mid-year 2017 Active/Passive Barometer found that most actively managed funds have failed to survive and beat their benchmarks, especially for funds with longer time horizons. The average dollar in passively managed funds typically outperforms the average dollar invested in actively managed funds, the research firm finds. Low-cost funds performed better than higher-cost funds.
Nonetheless, when compared to the trailing 12 months ended June 30, 2016, active funds’ success increased substantially in 10 of 12 categories in the year ended June 30, 2017. Forty-nine percent of active U.S. stock funds beat their composite passive benchmark in the 12-month period ended June 30, 2017, whereas only 26% had done so the year before.
Active funds in the large-, mid- and small-value categories had a combined success rate of 57% relative to their passive peers over the last 12 months.
Among active U.S. stock funds, the worst performers were small blend funds, of which only 32% beat their benchmarks in the past year. Last year, 46% of small blend funds beat their benchmark. The best performersamong active U.S. stock funds were small value and small growth funds, of which 58% and 61%, respectively, beat their benchmarks.
NEXT: Results by Category
Over the long term, actively managed U.S. large-cap funds
have not performed as well as mid- and small-cap U.S. equity funds. Over the
15-year period ended June 30, 2017, only 48% of large-cap funds survived. Among
the lowest-cost funds, 57% survived, but this declined to 29% for the
The large growth category has also been particularly difficult for active managers. Less than half of the actively managed large growth funds that existed 15 years ago survived, and only 7.1% managed to both survive and beat their average passively managed peers.
Value managers saw some of the most meaningful increases in their short-term success rates. Active funds in the large-, mid- and small-cap value categories experienced year-over-year upticks in their trailing one-year success rates of 44.1%, 48.1% and 28.2%, respectively. Morningstar says this is due to the fact that over the year ended December 31, 2016, the Russell 3000 Value Index outperformed the Russell 3000 Growth Index by more than 10 percentage points.
Success rates for actively managed U.S. mid-cap funds have tended to be more diverse and variable than for U.S. large- and small-cap funds. Morningstar says this is because many mid-cap funds bleed into other market cap segments or styles.
Investors in the lowest-cost quartile of
actively managed foreign large blend funds had the fourth-best success rate of
the subgroups Morningstar examined. Over the 10-year period ended June 30,
2017, 38.6% of these funds survived and outperformed their average passive
peers. Over the trailing 20 years, more than 80% of the lowest-cost actively
managed foreign large blend funds survived and outperformed their passive
Managers in the intermediate-term actively managed bond category saw the most substantial improvement in their one-year success rate; 85% of these funds survived and outperformed their passive peers.
Morningstar's mid-year 2017 Active/Passive Barometer report can be downloaded here.