More Active Managers Are Beating Passive Funds

Actively managed funds are doing a better job beating indexes, but they still trail passive peers over the long term.


Actively managed funds are performing “substantially” better after their bets paid off in the first half of 2017, according to Morningstar.

The percentage of U.S. active funds that beat passively managed peers was significantly higher across nearly every category in the 12 months through June, according to a report Tuesday from the research and data firm. About 49 percent of U.S. stock funds outperformed their passive benchmarks during the period, compared to a 26 percent success rate for all of last year.

It’s a positive development for actively managed funds, which have struggled with significant outflows in recent years as investors weary of underperformance switched their assets to lower-cost passive funds. Some of the most dramatic improvements have occurred among value managers, whose combined success rate jumped to 57 percent in the 12 months through June, according to Morningstar’s report.

Small-cap value funds had performed better than their passive counterparts just 27.7 percent of the time in the 12-month period through June 2016, while mid-cap value managers posted a success rate of just 8.1 percent, the report shows.

Morningstar’s findings are based on about 3,500 active and passive U.S. funds representing $10 trillion in assets, or about 60 percent of the U.S. fund market.

Another sharp increase in actively managed fund performance was seen in the small-cap growth category, where the success rate over passive peers more than doubled to 60.8 percent in the 12 months through June, from 27.8 percent in the same period of 2016. Intermediate-term bond managers did even better, beating passive bond funds 85.1 percent of the time, up from 24.5 percent in the 12 months through June 2016.


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Still, Morningstar warned that passive funds continue to beat actively managed peers over the long-term.

Over a 20-year period, just 16.7 percent of active large-cap blended funds outperformed their passive counterparts. Even when managers focused on small-cap companies — typically considered one of the best areas for active managers — less than a third beat passive funds over the long term.