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.

(Related: Advisors Sticking With Active Investments: Practical Perspectives)

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.

(Related: 2 Key Times to Invest in Actively Managed Funds)

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.

(Related: Can This Fee Structure Save Actively Managed 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.

“Active managers in the category have been rewarded handsomely for assuming credit risk as both investment-grade and below investment-grade credits have rallied,” the report explains.

(Related: Low Fees Drive Flows Into Active Funds: Broadridge)

Cost is a key factor in the relative performance of actively managed funds. To analyze that impact, Morningstar divides funds in each of the 12 categories into four quartiles for cost — the 25th percentile represent the lowest cost funds; the 100th percentile encompasses all the funds in the category — and compared their performances over the 10 years ended June 30.

In eight out of 12 asset categories, the lowest cost funds had the highest success rates, and in four categories — U.S. mid-cap and foreign blend, U.S. small-cap growth and U.S. small-cap value — funds in the 50th percentile performed best.

The cheapest funds in the small-cap value category — in the 25th percentile — were surprisingly the worst performers, and small-cap growth funds, like large-cap and mid-cap growth funds, had the lowest survival rates over 10 years.

“Cost matters even in emerging markets,” according the Morningstar report. “The lowest cost funds in this category had a success rate that was 31.8 percentage points higher than the success rate for the category as a whole during the decade ended June 2017.”  That was the largest measure of outperformance by the cheapest funds in any asset category.

Cost also has an effect on the survival rates of funds. Just 48% of large-cap funds survived for the 15 year-period ended June 30, and the highest cost large-cap funds had the lowest survival rate — 29% versus 57% of the lowest cost large-cap funds.

The Morningstar report is based on an anlysis of 3,500 active and passive U.S. funds, which have approximately $10 trillion in assets, representing about 60% of total U.S. fund assets.

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