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.

As for large-cap growth funds, passive funds had 10-year trailing returns of 8.3% vs. 7.5% for their active counterparts. In the lowest-fee quartile, active funds produced returns of 8.4% vs. 7.9% for active funds – again, a smaller difference in performance than in the broader results.

Success Rates

Across all fund categories, active funds’ success rates (i.e., the ability to survive and not be closed or merged) in 2015 improved in eight of the 12 categories compared with how they performed in 2014.

“The small-value category saw the most meaningful improvement, where active funds’ success rate nearly tripled, rising to 66.7% in 2015 versus 23.7% in 2014. Actively managed large-cap value and growth funds also enjoyed higher success rates in 2015,” explained Johnson, who is Morningstar’s director of global ETF research, and Bryan, director of passive strategies research.

“On the flip side, active small-growth managers saw the biggest comedown — the success rate of those funds fell 29.3 percentage points to 22.3%.

In general, the researchers say, the latest findings build on what the group concluded in June and December 2015.

“Specifically, we found that most actively managed funds failed to survive and outperform their passive peers, especially over the trailing 10-year period. The average dollar in passively managed funds typically outperformed the average dollar invested in actively managed funds,” they stated. For investors, they note, the conclusions are clear: “Investors would have substantially improved their odds of success by favoring inexpensive funds, as evidenced by the higher-than-average success ratios of the lowest-cost funds across most categories,” they explained.

“Conversely, investors choosing funds from the highest-cost quartile of their respective categories reduced their chances of success in all cases,” said Johnson and Bryan.

For instance, in the diversified emerging-markets fund group, the lowest-cost funds’ success rate that was 18.8 percentage points higher than that of all funds in the group for the 10 years ending Dec. 31, 2015.

In the mid-value fund group, the highest-cost products had a success rate of 23.5% — less than half that of the lowest-cost funds and about half that of the category as a whole, according to Morningstar.

Value managers seem to have the highest odds of long-term success, with those in the lowest-cost products have long-term odds of success of 53.6%; the highest-cost mid-blend funds have the lowest, 5.6%.

“Long-term success rates were generally higher among small-cap, mid-cap, foreign, and intermediate-term bond funds than U.S. large-cap funds,” the authors explained. “At 77.5%, actively managed diversified emerging-markets funds had the highest 10-year survivorship rate of any category we studied.”

— Check out Passive Beats Active in ’15: Report on ThinkAdvisor.