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April 22, 2016 at 09:44 AM
Morningstar’s latest research confirms that actively managed funds tend to underperform their passive counterparts.
But its analysts also find that higher-cost funds are more likely to underperform and to be closed or merged with other products, while lower-cost funds are likelier to survive and thrive.
Even better, the research group’s data shows investors tend to pick better-performing funds. On the other hand, investors picking the most expensive funds reduced their performance.
“Fees matter,” said Ben Johnson and Alex Bryan, the two authors of the Morningstar study, which was released earlier this month. “They are one of the only reliable predictors of success.”
Morningstar’s Measure
The Chicago-based research firm says its Active/Passive Barometer — released every six months — does not aim to settle the active-passive debate, but it does try to assess “investors’ odds of succeeding with active managers across asset classes, periods and fee levels.”
The barometer is measures active managers’ returns by comparing them not against an index but against a composite of passive index funds.
“We believe this is a superior approach because it reflects the actual, net-of-fee performance of passive funds, rather than an index, which isn’t investable,” explained Johnson and Bryan.
The research also looks at how the average dollar invested in different types of active funds performs when compared with that of a passive alternative, as well as the importance of fees.
This approach, the analysts say, “should give investors a better sense of their odds of picking winning managers across asset classes and categories while taking real-world factors into consideration.”
Large Caps
In the large-cap blended funds analysis, the Morningstar researchers found that the 10-year trailing returns (as of Dec. 31, 2015) were 7.2% for passive funds vs 5.9% for active funds. (Performance figures cited are asset weighted, not equal weighted.)
The passive funds with the lowest fees had 10-year trailing returns of 7.3% vs. 6.6% for active funds in the lowest-fee quartile – a smaller difference in performance.
