Active funds fail to do better in choppy markets

Year-over-year success rates for fixed income and real estate funds saw significant drop

Active funds fail to do better in choppy markets

A Morningstar survey found that less than half of actively managed funds surpassed their passive counterparts in 2022, casting doubt on the idea that active funds perform better in volatile markets.

A terrible year for equities and bonds tested the belief that active funds can traverse challenging markets better than their passive counterparts, according to the research firm's U.S. Active/Passive Barometer report. In 2022, active funds mostly failed to support the truth of that story: 43% of active funds in the 20 Morningstar Categories analyzed both survived and beat the average passive peer.

Active funds had a 43% success rate in 2018, down from a 47% clip in 2021. According to Morningstar, active managers in charge of fixed income and real estate funds had significant drops in their performance rates year over year, while U.S. stock funds took the lead in the active management race last year.

Even while active real estate and bond funds often exceeded passive counterparts over the long term, just 30% of fixed income active managers surpassed their passive colleagues. This is a 42 percentage-point decline from a year earlier. In 2022, U.S. stock pickers had a 49% success rate over a year, with active small-cap funds dominating with 57%.

The least costly funds succeeded more than twice as often as the most expensive ones, with a 36% success rate vs 16% for the decade ending December 31, further supporting the idea that fees still matter. During that period, 67% of the least costly funds endured, compared to 59% of the most expensive.

Real estate and bond funds often had the highest long-term performance rates, while US large-cap funds had the lowest.

In comparison to actively managed U.S. mid- and small-cap funds, actively managed U.S. large-cap equity funds have historically performed worse. The success rates for actively managed mid- and small-cap funds were 26% and 36%, respectively, for the 10-year period ending in December 2022, while 10% of active large-cap funds persisted and beat the average passive peer.

“In general, actively managed funds have failed to survive and beat their average passive peer, especially over longer time horizons; one out of every four active funds topped the average of their passive rivals over the 10-year period ended December 2022,” the Morningstar report said.