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More than half of actively managed U.S. mutual funds and ETFs outperformed their average passive counterparts in the 12 months ending at the end of June, according to a Morningstar report.
The study showed that 57% of actively managed funds and ETFs outperformed their passive counterparts, a sharp increase from 43% for the calendar year ended December 2022.
The Chicago-based researcher measures success by evaluating active funds against a benchmark composed of passive funds, reflecting the net-of-fees performance of investable passive funds. The analysis also examines the evolution of the average dollar invested in active funds versus the average dollar invested in passive funds and examines trends in active fund success by fee level.
Morningstar also shows the distribution of surviving active funds’ excess returns relative to their average passive peers to “help investors understand not only the odds of choosing a successful manager, but also the potential payout or penalty,” the report says.
This article was previously published by Ignites, a title owned by the FT Group.
Active funds outperformed across all asset classes and nearly every category tracked by the researcher, with corporate bond funds lagging the most, according to the report.
Just 40 percent outperformed their passive rivals in this category in the year ending at the end of June.
Morningstar’s analysis includes 8,212 funds and ETFs that represent about $17 trillion in assets, or about 55.9 percent of the U.S. funds market as of June 30, the report said.
Active small-cap funds had a success rate of 65 percent (a percentage that outperformed their average passive counterparts), compared to 56 percent of active mid-cap funds and 53 percent of active large-cap funds, compared to 55 percent. .8 percent49. percent and 39 percent, respectively, in June of the previous year, according to Morningstar.
The long-term success rates of active small-cap funds have generally been higher than those of large-cap funds because the small-cap market is “relatively less liquid and efficiently priced,” the report said.
Active funds invested in international stocks saw the greatest year-over-year variation, according to the report.
In the 12 months ending at the end of June, more than 63 percent of these funds beat their average passive peers, up 30 percentage points from June of the previous year. Active foreign equity funds were dominated by the large-cap foreign value stock category, which recorded a success rate of 75 percent for the period, the highest of all stock classes.
Active bond funds also performed well this year, as 55 percent of active bond managers beat the passive average, up from 30 percent in June 2022, according to the report.
Active intermediate core bond funds tend to take more credit risk than their index peers, which likely helped these funds this year after hurting them in 2022 as markets “rewarded credit risk after the having punished the previous year,” the report notes.
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But a banner year for active funds hasn’t changed their long-term history much, the report notes.
Only one in four active strategies survived and beat their average passive counterparts in the 10 years ended June 30. Long-term success is highest among foreign stock, real estate, and bond funds, while it is lowest among large-cap U.S. funds.
Overall, cheap active funds succeed more often than expensive funds, Morningstar noted.
About 31 percent of active funds in the cheapest quintile beat their average passive peers, compared to 19 percent of those in the most expensive quintile.
*Ignites is a news service published by FT Specialist aimed at professionals working in the asset management industry. Trials and subscriptions are available at enflamme.com.
