The script flipped from value to growth in 2023, but the narrative stayed the same for active managers.
Of the nearly 3,000 active funds included in our analysis, 47% survived and outperformed their average passive peer in 2023.
We further analyze these findings in the year-end 2023 installment of the Morningstar Active/Passive Barometer, a semiannual report that measures the performance of US active funds against passive peers in their respective Morningstar Categories. The Active/Passive Barometer spans over 8,300 unique funds that accounted for approximately $18 trillion in assets, or about 55% of the US fund market, at the end of 2023.
You can learn more about the background of our approach to the report in this article.
Most Active Managers Failed to Capitalize in 2023
When viewed as a whole, active funds had less than a coin flip’s chance of surviving and outperforming their average passive peer in 2023, although results varied widely across asset classes and categories.
Foreign and fixed-income active funds bounced back in 2023, but were weighed down by US stock-pickers’ declining performance. That group notched a success rate of 46% in 2023, versus success rates above 50% for foreign and fixed-income managers in aggregate.
Active bond funds struggled during the risk-off market in 2022, but they staged a significant comeback last year. Each fixed-income category included in our report saw its success rate increase by 19 percentage points or more in 2023. This trend aligns with active managers’ willingness to take on more credit risk than market-value-weighted passive peers. Tightening credit spreads worked in active managers’ favor last year while widening spreads hurt in 2022.
Year-Over-Year Change in Active Funds' One-Year Success Rate by Category (%)
But one year isn’t a sufficient time horizon from which to draw conclusions. Success rates can fluctuate wildly from year to year, depending on what’s going on in the markets and how that reflects on the actively managed portfolios as well as in the passive funds we measure them against.
Longer horizons provide stronger signals that investors can incorporate in their selection process. In general, actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons. Less than one out of every four active funds topped the average of their passive rivals over the 10-year period ended December 2023.
But success rates vary across categories. Long-term success rates were generally higher among the bond, real estate, and US small-cap categories, where active management may hold the upper hand. Investors can use this data to identify areas of the market where they have better odds of picking winning active funds.
Active Funds' Success Rate by Category (%)
Sizing Relative Performance of Passive and Active Investing
Success rates alone only tell half the story. The other half is the prospective payoff for choosing a winning fund and the penalty for picking a loser. The Active/Passive Barometer contains this information in the form of plots of the distribution of 10-year excess returns for surviving active funds versus the average of their passive peers.
Much like success rates, these distributions vary widely across categories. In the case of US large-cap funds, the distributions skew negative. This paints a bleak picture for active funds in these categories. They have low long-term success rates, while penalties can be high for picking a loser (per the negatively skewed distribution).
The opposite tends to be true of fixed-income, real estate, and certain foreign-stock categories, where long-term success rates have generally been higher and excess returns among surviving active managers skewed positive over the past decade. The exhibits below show the distributions of excess returns for surviving active funds from the large-blend and intermediate-core bond categories.
Distribution of 10-Year Annualized Excess Return for Surviving Active Large-Blend Funds
Distribution of 10-Year Annualized Excess Returns for Surviving Active Intermediate Core Bond Funds
Costs Matter for Both Passive and Active Strategies
The signal that rings loud and clear in this dataset is that fees matter. Funds in the cheapest quintile succeeded more often than funds in the priciest one (29% success rate versus 18%) over the 10-year period through 2023.
Investors have caught on. Over the past 10 years, the average dollar invested in active funds (asset-weighted average return) outperformed the average active fund (equal-weighted average return) in 19 of the 20 categories examined, as seen in the first three columns of the below table. That implies investors favor cheaper, higher-quality strategies.
Comparison of Asset- and Equal-Weighted 10-Year Returns %
The author or authors do not own shares in any securities mentioned in this article.Find out about Morningstar’s editorial policies.
While notching an improvement over 2022, slightly less than half (47%) of active strategies survived and delivered higher net-of-fees returns than their average passive counterpart. Actively managed funds' recent surge did little to change their long-term track record.
Foreign and fixed-income active funds bounced back in 2023, but were weighed down by US stock-pickers' declining performance. That group notched a success rate of 46% in 2023, versus success rates above 50% for foreign and fixed-income managers in aggregate.
Active fund returns against peer index funds and ETFs is a better comparison. About three-fourths of active large caps beat top-performing BSE 100 ETFs or Nifty 50 index funds/ETFs in 2023. Similarly, all active ELSS funds surpassed the lone tax-saver index fund's performance last year.
In simple terms, active investors attempt to outperform the returns of a specific benchmark, whereas passive investors accept the market return by tracking a specific index.
With more than $23 trillion in assets between them, BlackRock Inc., Vanguard Group Inc. and State Street Corp. have become the top shareholders in many US-listed companies.
Less than 10% of active large-cap fund managers have outperformed the S&P 500 over the last 15 years. The biggest drag on investment returns is unavoidable, but you can minimize it if you're smart. Here's what to look for when choosing a simple investment that can beat the Wall Street pros.
Advanced economies are expected to see an especially pronounced growth slowdown, from 2.7 percent in 2022 to 1.3 percent in 2023. In a plausible alternative scenario with further financial sector stress, global growth declines to about 2.5 percent in 2023 with advanced economy growth falling below 1 percent.
Active managers' underperformance in 2023 is still better than the 64% average annual rate reported over the 23-year history of the SPIVA scorecards, said the report, which was released Wednesday. Over the past 15 years, 88% of large-cap stock funds underperformed the S&P 500, while 93% of funds did so over 20 years.
Passive investing targets strong returns in the long term by minimizing the amount of buying and selling, but it is unlikely to beat the market and result in outsized returns in the short term. Active investment can bring those bigger returns, but it also comes with greater risks than passive investment.
Only one out of every four active funds topped the average of their passive rivals over the 10-year period ended December 2022. But success rates vary across categories. Long-term success rates were generally higher among bond, real estate, and foreign-stock funds, where active management may hold the upper hand.
Risk: Active funds have a higher risk than passive funds, as they are subject to the fund manager's skill, judgment, and errors. Passive funds have a lower risk than active funds, as they eliminate the human factor and closely mirror the index, resulting in lower volatility and tracking error.
Once that decision has been made, there may be reasons for adopting passive investment approaches, but investors should realise that they may face unforeseen risks. These include undesirable concentrations of stocks, systemic risk and buying at too high valuations.
Passive investing is buying and holding investments with minimal portfolio turnover. Active investing is buying and selling investments based on their short-term performance, attempting to beat average market returns. Both have a place in the market, but each method appeals to different investors.
Active funds generally have higher expense ratios due to the extensive research, analysis, and management activities performed by the fund manager. On the other hand, passive funds have lower expense ratios because the fund manager's role is limited, and the investment strategy is relatively straightforward.
Actively managed investments charge larger fees to pay for the extensive research and analysis required to beat index returns. But although many managers succeed in this goal each year, few are able to beat the markets consistently, Wharton faculty members say.
According to data from Morningstar Direct through June 30, actively managed stock mutual funds and exchange-traded funds beat their passive peers across categories, except in the large blend category, where passive trounced active by 1.33 percentage points.
Introduction: My name is Gregorio Kreiger, I am a tender, brainy, enthusiastic, combative, agreeable, gentle, gentle person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
