On this subject, we don’t mind sounding like a broken record. Actively managed funds, after fees, underperform passive funds and their benchmarks over time.
Morningstar have just released their semi-annual Active/Passive barometer. It’s a report published twice a year and covers nearly 21,000 active and passive funds across Europe with around €4.4 trillion in assets under management. They compile the same reports in the USA, covering 4,400 unique funds that account for approximately $15.9 trillion in assets (along with S&P SPIVA who also provide a similar service).
Morningstar’s Active/Passive barometer measures active managers success by:
- Evaluating active funds against a composite of actual passive funds—not versus a costless index. In this way, the benchmark reflects the actual, net-of-fee performance of the passive funds available to investors.
- Assessesing active funds based on their beginning-of-period category classification to better simulate the funds an investor would have chosen at the time.
- Considering how the average unit of currency invested in various types of active funds has fared versus the average unit of currency in passive funds.
So how did European active fund managers fare?
We are often told that fund managers can spot opportunity or mitigate risk in times of markets stress, yet active fund managers failed to use 2020’s stock market volatility to their advantage. Only half (50.2%) of active funds managed to outperform their passive rivals during the sell-off and recovery of 2020.
The figures are even worse over the long-term, with just 25% of active funds doing better than their tracker counterparts over 10 years. In some categories the success rates have been dire: in US Large-Cap Growth Equity, not a single active fund managed beat its passive counterpart over a 10-year period.
In just 2 of the 65 categories examined by Morningstar did the majority (greater than 50%) of active funds manage to survive and outperform their average passive peer over the decade through December 2020. Those aren’t very good odds considering that it’s nearly impossible to predict in advance which funds are likely to outperform.
One area close to home where active funds have managed to outperform is in UK Mid-Cap Equities. Over 1 year, 64.3% of active UK Mid-Cap fund managers have managed to outperform their passive counterparts. Over 10 years, the number is 70%. Before we get a loud ‘I told you so..”, the 10 year number for UK Large-Caps is 23.8%.
Here are the 10 year figures for some of the major asset classes:
Active fund 10 year success rate (% of active funds that have managed to survive and outperform average of passive funds)
Not even surviving
Part of the reason of the very poor 10-year performance for active funds is that many don’t even manage to survive. Less than half (49.2%) of UK Large-Cap funds manage to survive 10 years. In UK government bonds, exactly a half manage to survive.
The us the conclusion is clear: actively managed funds, after fees, underperform their benchmarks over time. Investors may be better served using passively managed alternatives such as index tracking funds. This evidence is so consistent and presented so often it almost sounds like a broken record, but given how many investors pay high fund fees for under-performing funds, we believe it’s worth repeating again and again.
The data speaks for itself but we’ll conclude by saying that when you invest in “the market” by holding passive funds, you get the market return with a fair degree of certainty. You will not experience the additional uncertainty of whether your chosen active fund will outperform or underperform the market. Peer reviewed academic data shows that over longer periods of time very few active funds are able to outperform the market and those funds that do are nearly impossible to identify in advance. The fees for passive funds are much lower than those for active funds. We agree with the evidence which suggests that active fund management comes with lower average investment returns after fees and less certainty of performance versus the market.
Past performance is not a reliable indicator of future performance. The value of investments may go down as well as up and you may get back less than you invest.