Actively managed funds have been making a comeback this year in terms of their relative performance compared with their passively managed counterparts, but advisors should not overemphasize the good news or expect it will continue.
According to Morningstar’s latest semiannual Active/Passive Barometer, which compares the performance of actively managed funds in different asset categories to their passive counterparts (as opposed the indexes themselves), the success rate of actively managed funds increased in 10 out of 12 categories for the 12 months ended June 30 compared with the previous 12 months, but the longer term picture was not as rosy.
About 49% of active U.S. stock funds beat their composite passive benchmark over the 12 months ended June 30 compared with just 26% during the previous 12 months, but that still indicates that less than half the active equity funds outperformed.
(Related: Not All Active Managers Are Poor Performers)
Longer term, the success rates were even lower. Over the five years ended June 30, the percentage of outperforming actively managed equity funds — including foreign equity funds — was about 30% and over 10 years about 20%. The long-term success rates — which measure the survival and performance rates of funds — were generally higher for small-cap, mid-cap, foreign stock and intermediate term bond funds and lowest among U.S. large-cap funds.
Over the 12 months ended June 30, over 50% of value funds in the large-cap, mid-cap and small-cap categories beat their passive counterparts as did mid-cap and small-cap growth funds, but diversified emerging markets led the way. Almost 62% of them outperformed their equivalent passive funds, and intermediate-term bond funds did even better. Just over 85% of actively managed intermediate term bond funds bested their passive counterparts.