Active Funds Lag Passive Peers in Volatile Market: Morningstar

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Long-term success rates generally were higher among foreign-stock, real estate and bond funds and lowest among U.S. large-cap funds, according to the report, which examined open-end mutual funds and exchange-traded funds.

Among other findings:

  • U.S. stock-pickers’ one-year success rate was over 43% midway through 2022, slightly higher than their 2021 performance. “Active mid- and small-cap funds paved the way with success rates of 54% and 56%, respectively, while large caps’ 34% success rate weighed on the overall rate of success of U.S. active managers,” Morningstar reported.
  • Longer term, in the decade through June 2022, 9.6% of active U.S. large-cap funds survived and outperformed their average passive peer, compared with success rates of 24.8% and 31.8% among active mid- and small-cap funds, respectively.
  • Slightly more than half of active fixed income funds bested their average index peer over the 12 months through June 2022, yet the success rate for active managers across the three fixed income categories dropped 20 percentage points from 2021. Active high-yield bond managers achieved a 58.3% success rate, while only 30.2% of active corporate bond funds outpaced their passive peers.
  • Just under half of active bond funds survived and outperformed passive peers for the decade through June this year.
  • Success rates for active foreign stock funds declined in all six categories reviewed, translating to a combined 23% one-year success rate, far below their 37% performance in 2021.
  • Ten-year data for U.S. large-cap funds indicates the probability and penalty for picking an underperforming manager tend to be greater than the probability and reward for finding a winner, while the inverse tends to be true for fixed income and certain foreign-stock categories analyzed, the report said.
  • U.S. large-cap growth active managers “have had a particularly difficult time delivering value for investors” in the long term. “Nearly 70% of the active funds that existed in this category 20 years ago have died, and just 4.5% managed to both survive and outperform their average passive peer.”
  • Over the past decade, the average dollar invested in active funds outperformed the average active fund in most U.S. categories, suggesting investors favored “cheaper, higher-quality” funds.

“Active managers who are afforded flexibility in their mandates are more capable of navigating market volatility than their rigid passive peers — or so the thinking goes,” Bryan Armour, director of passive strategies research for North America at Morningstar Research Services LLC, wrote in a article Monday.

The barometer results, however, cast doubt on the credit afforded active managers for nimbly navigating troubled markets, he added.

“When viewed as a whole, an active fund had below a coin flip’s chance of surviving and outperforming its average passive peer over the 12 months through June 2022, although results varied widely across asset classes and categories,” Armour wrote.

The U.S. Active/Passive Barometer spans nearly 8,400 funds, about half of which survived and represented about $15.6 trillion in assets, or about 69% of the U.S. fund market, at this year’s  midpoint, Morningstar said.

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