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Portfolio > Mutual Funds > Equity Funds

Active Equity Funds Rebound, but Will Performance Last?

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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.

Fees, not surprisingly, played a key role in the relative performance and survival of actively managed funds.

Less than 2% of the priciest large-cap equity funds beat their passive composite over the decade ended June 29, and only 29% of the highest cost funds survived over the 15 years ended June 29.

Overall, the cheapest active funds had success rates more than double those of the priciest ones — showing a 33% success rate over 10 years versus 14% for the most expensive funds.

“Cost matters. Fees are the one of the best predictors of future fund performance,” according to the Morningstar report.

Unlike actively managed stock funds, which performed better over the past 12 months than previously, actively managed fixed income funds did worse, according to Morningstar. The success rate of fixed income funds over the 12 months ended June 29, at just under 27%, was less than success rate for the 3-, 5- and 10-year periods.

— Check out US Among Top 3 Global Markets for Low Fees: Morningstar on ThinkAdvisor.


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