Active fund managers have “failed to impress” in the past year, despite expectations that they should beat passive funds more easily.
An average of 35 per cent of active equity funds outperformed their passive peer in the 12 months to June this year, according to Morningstar’s Active/Passive Barometer, which tracks the performance of 30,000 Europe-domiciled funds running €7tn (£6tn) in assets.
Only seven equity categories saw more than half of their active managers perform better than their passive counterparts.
Active funds are expected to outperform passives in times of volatility, as their flexibility should allow them to avoid the worst of any downturn.
But this was not the case last year, said Dimitar Boyadzhiev, a senior analyst in Morningstar’s passive strategies research team.
Historical active equity funds' success rate (per cent)
“The biggest driver of active funds' failure is their inability to survive, which is often a result of lackluster performance,” he said.
He said this can be explained by a mix of wrong stock-picking decisions and the compounding negative effects of higher fees relative to their low-cost passive competitors.
"The rate of success of active managers...in the one-year period to the end of June 2022 failed to impress", Boyadzhiev added.
Morningstar measures the active funds’ performance against specific passive funds, instead of an index, so the performance net-of-fees could be compared.
Active funds on a long-term basis did not fare much better.
Less than a third of active equity fund managers beat their passive peer in the past decade, with just 24 per cent of active equity fund managers outperforming passives, and just 21 per cent of fixed income managers.
UK mid-cap active managers were the most successful, with 50 per cent beating their passive counterparts, with nearly a third of UK large-cap managers achieving the same.
Global emerging markets and Europe ex-UK managers had a 25 per cent success rate in the past ten years, dropping to 11.2 per cent for European large-cap managers.
Fixed income managers did better in the past decade, with around half of those in global equity income or European equity income outperforming their passive peer.
“A key driver has been successful bets on the healthcare and technology sectors, which have delivered impressive performance over the past decade,” Boyadzhiev said.