As the battle between active versus passive investing wages on, it’s the passive, or indexing camp that continues to maintain bragging rights.
Despite a modest decline in stock prices in 2018, actively managed funds still couldn’t find their footing. The majority of active U.S. stock funds (62 percent) underperformed their passively managed peers, according to Morningstar’s Active/Passive Barometer. The semi-annual report analyzes the performance of active funds in 20 different categories including foreign stocks, fixed income and real estate.
Although fourth-quarter performance for stocks was among the worst going back to 1987, last year’s losses were mostly muted by strong equity performance earlier in the year. Broad market funds which hold large-, mid- and small-cap stocks declined marginally last year. For example, the Schwab U.S. Stock Market ETF (SCHB) lost more than 5 percent in 2018.
Oddly, even during good markets active funds have struggled. In 2017, the S&P 500 gained 21.8 percent, yet more than half (54 percent) of active U.S. stock funds failed to outperform their passive counterparts. It's alarming that active managers haven’t been able to beat passive yardsticks even when the wind has been in their proverbial sails.
And underperformance with active managers hasn’t been limited to stocks.
Among global real-estate funds, a whopping 85.1 percent of active managers were beaten by their passive peers during the past decade.
Bond fund managers fared slightly better compared to their equity manager colleagues. And among corporate-bond funds, 66.7 percent outperformed during the past ten years, as did 56.3 percent of actively managed high-yield bond funds.
The inability of active stock funds to outperform has been especially pronounced over longer time periods. Just 24 percent of all active funds topped their passive rival over the 10-year period ending December 2018. Funds investing in foreign stocks and bonds had higher rates of success compared to U.S. large-cap funds.
Fund cost was another important finding within Morningstar’s research. The least-expensive active funds enjoyed about twice as much success (32.5 percent) compared to the most-expensive active funds (17.2 percent). Moreover, two-thirds of the cheapest active funds survived whereas roughly half of the most expensive funds failed to survive.
While fee reductions over the past few years have been widespread in the ETF marketplace, they’ve been less common among active funds. Instead of reducing fund fees, asset managers with active funds have cut personnel staffing to offset dwindling assets and declining revenue.