Studies have long shown active management underperforms passive, but in a year when the markets were up 28%, active funds’ success rates were trending upward. According to Morningstar’s Active/Passive Barometer, nearly half of active U.S. stock funds (48%) outperformed their average passive peer in 2019, up from 38% in 2018.
Morningstar’s Active/Passive Barometer, a semi-annual report that analyzes nearly 4,400 unique funds that account for about $13.8 trillion in assets, found that active funds’ success rates were up in 14 of the 20 Morningstar categories in 2019. Success rates were up for U.S. mid-blend, U.S. mid-value, U.S. mid-growth, world large stock, U.S. real estate and the U.S. small-cap categories, among others. Fifty-seven percent of small-cap funds beat the average passive fund in their categories, up from 32% in 2018.
That said, the report pointed out that over longer time horizons, active funds failed to survive and beat their benchmarks, with just 23% of active funds outperforming the average passive rival over the past 10 years.
Corporate bond managers took a big hit last year, with their year-over-year success rates falling 22.6%.
“A generally riskier credit profile and shorter duration versus passive peers hurt these funds during a year when higher-quality credits outperformed and interest rates declined,” wrote Ben Johnson, director of global exchange traded fund research for Morningstar and author of the report.
Lower-cost active funds were more likely to outperform their passive peers; the cheapest funds succeeded 34% of the time, compared with a 14% success rate for the priciest funds.
“This reflects cost advantages as well as differences in survival with 68% of the cheapest funds surviving against 55% of the most expensive,” Johnson said.