A little over one-third (36%) of US-based active managers outperformed their average passive peer, including ETFs, over the 12 months through June 2018, down from 43% of active managers which had achieved the feat as at year-end 2017.
Morningstar introduced the Active/Passive Barometer in June 2015 to help investors measure the relative performance of active US fund managers against passive US funds within their respective Morningstar categories.
The findings, part of investment research house Morningstar’s Active/Passive Barometer, support the ongoing argument that passive funds, such as index-tracking ETFs, offer a distinct advantage compared to their actively managed counterparts.
Its semi-annual report, introduced in June 2015, measures the performance of US active managers against their passive peers within their respective Morningstar categories.
The research uniquely evaluates active managers’ success relative to the actual, net-of-fee performance of passive funds, rather than an index.
When compared with mid-year 2017 figures, active funds’ success rates dropped in 15 of the 19 categories examined.
Success rates among active value managers experienced one of the most pronounced year-on-year declines. Stock-pickers in the large-, mid-, and small-value categories saw their success rates decline 23, 27, and 27 percentage points respectively.
Actively managed US real estate funds experienced a notable spike higher relative to mid-year 2017. That said, just 39% of active funds in the category survived and beat their composite passive benchmark in the 12 months through June.
Active funds in the intermediate-term bond category continued to stand out. More than 70% of them beat their average passive peer during the year ended in June, although their one-year success rate declined.
According to Morningstar, active managers in the category were rewarded handsomely for assuming credit risk as both investment-grade and below-investment-grade credits have enjoyed a sustained rally. This is evident in their success rates over the trailing one-, three-, five-, and 10-year periods.
In general, however, actively managed funds have failed to beat their benchmarks, especially over longer time horizons.
For those investors who still wish to maintain a degree of active exposure in their portfolios, the research shows they could greatly improve their odds of success by favouring low-cost funds. For example, the 20-year survivorship rate of active funds in the least-expensive fee quartile of the large-, mid-, and small-blend categories was 52% through June 2018. Meanwhile, just 32% of the funds in the most expensive quartile of the same categories survived.
This finding does, however, reflect the notion that minimising costs plays a significant role in portfolio performance, thus reaffirming the case for low cost passive vehicles such as ETFs.