More than a third of active equity managers outperformed passive counterparts over the last one-year period. Active bond managers did even better, with 62.7% on average outperforming their passive alternative.
These findings are contained in the mid-year Morningstar’s Active/Passive Barometer, a semi-annual report that measures the performance of European-domiciled active funds against passive peers in their respective European, Asian and African Morningstar categories. It spans nearly 26,000 unique active and passive Europe-domiciled funds that account for approximately €6.3 trillion in assets, or about half of the total European fund market.
The first half of 2023 was positive for developed equity markets, while emerging markets lagged. On average, 36.6% of European active equity managers in the 43 equity categories analysed by Morningstar surpassed the average passive fund in the one-year period to the end of June 2023. This was up from 33.6% at the close of 2022 and 30.4% a year earlier.
“Typically, success rates for active managers are higher in equity categories focusing on the mid-cap and smaller-cap segments of the spectrum than in large-cap categories”, said Dimitar Boyadzhiev, Senior Analyst of Morningstar Passive Strategies Research in Europe. “Active funds also have higher odds of success in equity categories where the average passive peer's exposure is structurally biased to a specific economic sector or top-heavy in terms of individual names.”
Not all the active managers joined the party of higher success rate over the last year. Only 19.4% of active managers in the Eurozone large-cap category outperformed passive peers in the year to the end of June 2023, significantly down from 44.1% a year earlier. The year 2023 began on a promising note for the Eurozone, propelled by the tech sector's momentum. But as the European Central Bank announced mid-year rate hikes, the narrative shifted to risks of economic slowdown and money managers found themselves in choppy waters.
Active Bond Managers Do Even Better
Bond markets also regained strength in the first half of 2023, with rising yields driving the demand for developed government and investment-grade corporate issuers. Market participants also started to position for an eventual peak in interest rates. As a result, investors' focus has been shifting from the short to the longer end of the maturity spectrum. Against this backdrop, 62.7% active bond managers in the 24 categories analyzed by Morningstar outperformed their passive alternative in the one-year period to the end of June, up from 55.5% at the close of 2022 and 46.2% the year before.
Active managers in the EUR government bond category saw the one-year success rate jump to 66.3% from 38% a year earlier, and active funds in EUR corporate bond category delivered a one-year success rate of 78.7%, strongly up from 27.1% a year earlier. Their peers in the GBP government and corporate bond categories also improved.
Passive Funds Are Still the Long-Term Winners
“While the overall rise in short-term success rates by active managers is encouraging, the long-term picture remains solidly in favor of passive funds”, said Boyadzhiev. “On average, only 17.1% of active equity managers and 23.1% of active bond managers managed to beat their passive alternative in the 10-year period to the end of June 2023”.
Moreover, the Morningstar’s Active/Passive Barometer shows that passive funds tend to survive longer. In the 10-year span to the end of June 2023, on average 53.7% of active equity funds survived, while 63% of index-tracking funds did. The trend is similar in fixed income, where 52% of active funds survived compared with 60.8% of passives. The likelihood of a fund's survival is linked closely to its success rate. “The primary reason most active funds falter is their short lifespan, often attributed to subpar performance”, said Boyadzhiev.
FAQs
Active bond funds struggled during the risk-off market in 2022, but they staged a significant comeback last year. Each fixed-income category included in our report saw its success rate increase by 19 percentage points or more in 2023.
Are active funds worth it? ›
When all goes well, active investing can deliver better performance over time. But when it doesn't, an active fund's performance can lag that of its benchmark index. Either way, you'll pay more for an active fund than for a passive fund.
How often do active funds outperform passive funds? ›
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.
Do active funds beat the market? ›
Actively managed investments charge larger fees to pay for the extensive research and analysis required to beat index returns. But although many managers succeed in this goal each year, few are able to beat the markets consistently, Wharton faculty members say.
What are the disadvantages of active funds? ›
Cons
- there's no guarantee an active fund will perform better than the index – in fact, research shows that relatively few active funds do.
- it's not enough to just beat the index – active funds have to beat it by at least enough to cover their expenses, such as transaction fees.
Long-term trends and low costs can help investors decide between active and passive funds. The script flipped from value to growth in 2023, but the narrative stayed the same for active managers. Of the nearly 3,000 active funds included in our analysis, 47% survived and outperformed their average passive peer in 2023.
Do active funds outperform? ›
In general, actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons. Just one out of every four active funds topped the average of passive rivals over the 10-year period ended June 2023. But success rates vary across categories.
Do active funds perform better in down markets? ›
Active funds earn better returns during the down market which provide a hedge against the down-side risk.
Why do active funds underperform? ›
Why do index funds beat actively-managed funds? Simple mathematics. In a given period of time, half of investors will beat the market and half will underperform. That's because the market is a zero sum game and not Lake Woebegone where everyone can be above average.
Is it better to invest in active or passive funds? ›
Because active investing is generally more expensive (you need to pay research analysts and portfolio managers, as well as additional costs due to more frequent trading), many active managers fail to beat the index after accounting for expenses—consequently, passive investing has often outperformed active because of ...
Morningstar found that from 2014 to 2023, just one in every four active funds beat its average indexed peer. And index funds dominated active funds in the largest categories. The U.S. large-blend category represents about 27% of the U.S. mutual fund and ETF market.
Why do financial advisors hate index funds? ›
Financial Advisors' Fees Are Too High to Use Index Funds
Up until this point, the portfolios were made up of various high-fee mutual funds – all of which attempted to outperform the market in one way or another. There were some that specialized in stock picking – trying to find the next Google or Amazon.
What funds outperform the S&P 500? ›
10 funds that beat the S&P 500 by over 20% in 2023
| Fund | 2023 performance (%) | 5yr performance (%) |
|---|
| MS INVF US Insight | 52.26 | 34.65 |
| Sands Capital US Select Growth Fund | 51.3 | 76.97 |
| Natixis Loomis Sayles US Growth Equity | 49.56 | 111.67 |
| T. Rowe Price US Blue Chip Equity | 49.54 | 81.57 |
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Index funds track benchmark indices and deliver returns closely aligned with the performance of the underlying index, adjusted for expenses and tracking error. Conversely, active funds rely on the expertise of the fund manager to generate returns that may outperform the benchmark.
Why are active funds more expensive? ›
Usually, they are more expensive than passively managed index funds because of the costs associated with having fund managers actively seek out securities they feel will help their funds outperform corresponding indexes.
Who manages active investing funds? ›
In general terms, active management refers to mutual funds that are actively managed by a portfolio manager. Passive management typically refers to funds that simply mirror the composition and performance of a specific index, such as the Standard & Poor's 500® Index.
Are active bond funds worth it? ›
The general point, however, is that active bond funds have many ways to help generate excess returns, even in an environment of rising interest rates. Many investors seek exposure to bonds for three key characteristics: income, portfolio diversification, and liquidity.
Should I choose active or index funds? ›
Index funds offer lower fees and tax efficiency. Due to their passive nature, they often perform in line with market benchmarks, making them suitable for investors seeking broad market exposure at lower costs. On the other hand, active mutual funds aim to outperform the market by employing active management strategies.
