Financial advisors looking for actively managed funds to outperform their passive counterparts should consider the results of Morningstar’s latest Active/Passive Barometer.
Over the 12 months ended June 29, a greater percentage of actively managed equity funds outperformed their passive counterparts compared with the previous 12 months — 48% vs. 37% — but only 23% outperformed their passive peers over 10 years. Moreover, between 35% and 45% of actively managed stock funds failed to survive beyond 10 years; the rates varied by category.
The Active/Passive Barometer, which analyzes the relative performance of 4,000 actively managed mutual funds and ETFs with a cumulative $12.5 trillion in assets, or 64% of the U.S. fund market, showed growth funds having the biggest jump in relative performance versus passive funds over the 12 months ended June 30.
The success rate, which Morningstar defines as the share of active funds that both survived and outperformed the average of their passive peers, rose to 66% from 44% for equity funds over the previous 12-month period.
Longer term, however, the success rate of equity growth funds in different capitalization categories was much lower. Large-cap growth funds were the biggest laggards with success rates of 8% and 12%, respectively, over 10-year and 15-year periods. In addition, more than 60% of large-cap growth funds that existed 15 years ago failed to survive.
Advisors expecting actively managed funds to outperform over the next downturn may want to consider Morningstar’s 15- and 10-year data, which covers the period before, during and after the financial crisis.