Across most fund categories, active managers are posting stronger performances, even as they lose assets to passive indexes.
In the most recent semi-annual update of Morningstar’s Active/Passive Barometer, active U.S. equity fund managers posted a substantial increase in their success rate relative to yearend 2016. While 49 percent of U.S. active stock funds beat their composite passive benchmark in the 12-month period ending June 30, 2017, only 26 percent were able to beat their benchmark for the 12-month period ending Dec. 31, 2016.
Morningstar defines active manager success rate as the ability to survive and beat a benchmark over a period of time. Compared with the 12-month period ending June 30, 2016, active managers have increased their success rates within 10 of the 12 fund categories examined in the report. Value managers in particular have enjoyed an increased success rate.
Yet, in another report released this week, Morningstar notes that $19.6 billion flowed out of active equity funds in July while $10.8 billion flowed into passive equity funds, and that outflows from active funds and inflows to passive funds are accelerating across most fund categories.
Managers of small-cap blended funds slid the most in their success rates -- fewer than one-third of managers in the small-cap blend category were able to outperform their passive benchmarks over the 12 months through June 30, 2017, versus 42 percent in the period ending June 30, 2016.
Morningstar notes that low-cost funds of any type tend to succeed more often than high-cost funds over the long term. For the most part, actively managed funds still fail to survive and beat their benchmarks, particularly over longer time periods. Assets invested in passive products will typically outperform assets invested in actively managed products, according to Morningstar.
While many studies evaluating active managers compare their performance to benchmark indexes, the Active/Passive Barometer measures their performance against passive peers within their Morningstar categories to provide a comparison between active managers and the net-of-fee performance of passive funds.
In every active category, a majority of managers survived over trailing 10-year periods; however, survival rates were widely dispersed. Morningstar determines survivorship by evaluating whether a fund still exists throughout its study period. The highest 10-year survival rate, 75.6 percent, was posted by diversified emerging markets funds. U.S. small-cap growth managers were the least likely to survive over the 10-year period ending June 30, posting a 51.2 percent survival rate.
Morningstar for the first time included calculations for the trailing 15- and 20-year periods for each fund category. Of particular concern are the low long-term survivorship rates posted by many categories of active funds. Intermediate-term bond funds posted the lowest survival rate, with only 34 percent of 203 funds surviving over a 20-year period. Just 37 percent of large-cap blend and large-cap value funds survived over a 20-year period.
Active managers in the U.S. small-cap, mid-cap, foreign stock and intermediate-term bond funds posted higher than average long-term success rates, while managers in U.S. large-cap funds posted lower than average long-term success rates. For example, large-cap growth equity managers posted the lowest 15-year success rate at just 7.1 percent, while intermediate-term bond managers posted the highest, beating their benchmarks at a at a 38.7 percent rate