Active funds enjoy run of outperformance versus passive peers: Morningstar (2024)

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Active funds enjoy run of outperformance versus passive peers: Morningstar? ›

The research firm's Active/Passive Barometer, which is published twice a year and covers about 8,200 funds with some t $17tn between them, found that the highest percentage of outperformers came among foreign equity strategies, with 63% of active funds beating their passive peers, a significant improvement from 30% ...

Active Funds Fell Short of Passive Funds in 2023

Less than one out of every four active strategies survived and beat their average passive counterpart over the ten years through December 2023. One type of active investment strategy generally trails in long-term success rates.

More than a third of active equity managers outperformed passive counterparts over the last one-year period. Active bond managers did even better, with 62.7% on average outperforming their passive alternative.

In general, actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons. Just one out of every four active funds topped the average of passive rivals over the 10-year period ended June 2023. But success rates vary across categories.

Last year, 47% of actively managed open-end mutual funds and exchange-traded funds beat their benchmarks — a marked increase over the 43% hurdle rate in 2022. Morningstar refers to the boost as a “surge.” Yet active managers haven't become better at beating the market over the long term, as Morningstar acknowledges.

Of the nearly 3,000 active funds included in our analysis, 47% survived and outperformed their average passive peer in 2023.

Although it is very difficult, the market can be beaten. Every year, some managers boast better numbers than the market indices. A small fraction even manages to do so over a longer period. Over the horizon of the last 20 years, less than 10% of U.S. actively managed funds have beaten the market.

Over the 20-year performance horizon, the success rate is as low as 5%. The investment implication, as it so often is, is to invest the bulk of your portfolio in index funds. Investing in an actively managed mutual fund or ETF represents a triumph of hope over experience.

Therefore, active funds are more likely to beat the passive index funds during the down market. In this section, we compare the performance of the active funds and passive index funds over the business cycle. To determine the state of the economy, we the definition provided by NBER.

That makes outperforming the S&P 500 on a consistent basis no small task. The one fund that has beaten the index in nine of the past 10 years is the Technology Select Sector SPDR Fund (NYSEMKT: XLK).

What is the 80% rule for mutual funds? ›

The Names Rule requires that if a Fund's name suggests that the Fund invests in a particular type of investment or investments, or in investments in a particular industry, group of industries, countries, or regions, then such Fund must adopt a policy to invest at least 80 percent of the value of its assets² in such ...

Ramsey recommends investing in four types of mutual funds: growth and income funds, growth funds, aggressive growth funds, and international funds.

"I recommend the S&P 500 index fund, and have for a long, long time to people. And I've never recommended Berkshire to anybody," Buffett said at Berkshire's annual shareholder meeting in 2021. That investment strategy may not be exciting, but it has been a surefire moneymaker for patient investors.

Active funds strive for higher returns and come with higher costs and risks. Passive funds offer steady, long-term returns at lower costs but carry market-level risks. Explore key differences between active and passive funds in this blog.

For example, when the market is volatile or the economy is weakening, active managers may outperform more often than when it is not. Conversely, when specific securities within the market are moving in unison or equity valuations are more uniform, passive strategies may be the better way to go.

Typically, passive funds own most of the same securities, and in the same weightings, as their respective indices. Passive fund managers make no active decisions, potentially resulting in less trading – which reduces fund expenses as well as potential taxable distributions to shareholders.

The Findings: With regard to performance, the study finds “no evidence that the average active bond fund underperforms a set of equivalent passive funds” and that there is even some evidence that active bond funds outperform.