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Half of Active U.S. Stock Funds Beat Their Passive Rivals in 2019

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In 2019, 48% of active U.S. stock funds survived and outperformed their average passive counterparts, compared with 38% in calendar year 2018, Morningstar reported Thursday.

Morningstar’s semiannual report spans some 4,400 unique funds that account for approximately $13.8 trillion in assets, or about two-thirds of the U.S. fund market.

Active funds’ success rates year over year increased in 14 of 20 categories considered in the report. Forty-seven percent of active funds beat the passive composite for their category in the year.

Among U.S. stock-pickers, small-cap funds experienced the biggest rebound in one-year success rates, as 57% of these funds outpaced the average of the passive funds in their categories, up 25 percentage points from 2018.

The gap between large- and small-caps’ performance doubled last year relative to 2018. This helped to lift small-cap managers’ success rates, as they tended to favor large-cap names, according to Morningstar.

Active funds’ one-year success rate in the corporate-bond category spiraled downward in 2019. The report said a generally riskier credit profile and shorter duration versus passive peers hurt these funds during a year when higher-quality credits outperformed and interest rates declined.

Morningstar noted that actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons. In the 10-year period ended in December, only 23% of all active funds topped the average of their passive rivals.

Long-term success rates were generally higher among foreign-stock funds and bond funds and lowest among U.S. large-cap funds.

According to the report, the distribution of 10-year excess returns for surviving active funds varied widely across categories, compared with the average of their passive peers.

U.S. large-cap funds skewed negative, the report showed, indicating that the likelihood and performance penalty for picking an underperforming manager tended to be greater than the probability and reward for finding a winner.

For the fixed income and foreign-stock categories Morningstar examined, the inverse tended to be true: Excess returns among surviving active managers skewed positive over the past decade.

Morningstar said its data suggested that the average active dollar outperformed the average active fund in all but two categories over the past 10 years, implying that investors had favored cheaper, higher-quality funds.

The cheapest funds had a 34% success rate over the 10-year period ended Dec. 31, compared with a 14% success rate for the most expensive ones.

The report said this reflected not only cost advantages but also differences in survival, as 68% of the cheapest funds survived, versus 55% of the most expensive ones.

— Check out Active Equity Funds Had Biggest Monthly Outflows Since 2008 on ThinkAdvisor.