Morningstar has published its semi-annual report entitled European Active/Passive Barometer, designed to measure the performance of European-domiciled active funds against passive peers in their respective Morningstar Categories.
Key takeaways from the latest study show that European stock-pickers’ long-term success rates are low. A majority of active managers both survived and outperformed their average passive peer in just two of the 49 categories Morningstar examined over the decade through June 2018.
Over the 10 years through June 2018, active managers’ success rate was less than 25 per cent in more than half of the categories surveyed. Active funds’ 10-year success rates in the largest equity categories (as measured by assets under management) are amongst the lowest of all the categories examined.
A small percentage (between 11.5 per cent and 23.7 per cent) of managers have achieved long-term success in the Europe large-cap blend, global large-cap blend, and global emerging-markets categories. The same subpar result is echoed across the two largest ex Europe single-country categories – US large-cap blend and Japan large-cap – in which active managers achieved success rates of just 12.4 per cent and 17.8 per cent, respectively.
Active managers fared better in some categories than others, Morningstar writes.
“For example, those in the UK mid-cap category have consistently outpaced their average passive peer. Three fourths of active funds available to investors in this category 10 years ago both survived and outperformed their average passive peer over the ensuing decade. Beat rates for the Norway equity category are slightly lower but still favour active management. Nearly 60 per cent of active funds in the Norway equity category survived and outperformed their average passive competitor over the past 10 years.
“Survivorship rates are positively correlated with odds for success. The biggest driver of active funds’ failure is their inability to survive, which is often a result of lacklustre performance.”
Comparing mortality rates between active and passive funds shows that the latter have had better odds of survival over the long term. The contrast is starker over longer lookback periods, Morningstar writes.
Active fixed-income managers’ success rates have also been low. Over the past decade, less than a fourth have managed to both live and outsmart their average passive peer in 10 of the 12 categories Morningstar studied.