After chasing index funds during a very strong stock market last year, many active managers hoped to perform better in what has been a choppier 2018 -- but according to a recently released report from Chicago-based Morningstar, they’ve fallen even further behind their passive peers.
For the most part, actively managed funds fail to survive and overcome the performance of their benchmarks.
The one-year success rate for active mutual funds declined relative to end-of-year 2017, according to the August 2018 Active/Passive Barometer report released Wednesday by Chicago-based Morningstar. In the 12 months through the end of June, 36 percent of active managers survived and outperformed their average passive peer. In the calendar year of 2017, 43 percent of active managers had outperformed.
When compared with figures from mid-year 2017, active managers’ success rates, defined as surviving and outperforming a composite average peer, declined in 15 of the 19 categories examined by Morningstar.
Released semiannually, the Active/Passive Barometer compares active and passive funds within Morningstar categories using 4,500 U.S. funds that account for $16.1 trillion in assets, representing 79 percent of the US. Fund market.
The strong market is still partially responsible for active funds’ underperformance, according to Morningstar, as many managers have kept cash on hand to meet redemptions or to wait for opportunities to enter or add to a position, muting their performance with a “cash drag.”
In particular, active value managers have struggled to outperform an average passively managed peer fund, as stock pickers in value categories across market capitalization experienced large drops in their success rates.
U.S. real estate funds stood out as an exception to the otherwise declining performance of active management, spiking higher in the most recent report. Nevertheless, just 39 percent of active real estate funds beat their composite passive peer.
Active management has clearly worked to the benefit of intermediate bond investors over the past 12 months, posting a one-year growth rate of 70 percent. Morningstar attributes strong performance in this category to managers’ willingness to assume additional credit risk.
The report reiterates Morningstar’s findings that low-cost funds improve investors’ odds of success. Lower cost funds tend to have higher survivorship rates, leading to above-average success rates. More efficient areas of the market, like U.S. large-cap funds, tend to have lower long-term success rates than less efficient aras of the market like bond funds and foreign stock funds.