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Investing

Morningstar: Half of active equity funds top benchmarks in last year; long term a different story

Actively managed U.S. mutual funds have generally been unable to surpass their benchmarks, particularly over longer time periods, concludes a Morningstar report released Tuesday.

The report analyzes active funds against a composite of passive funds that Morningstar says "reflects the actual net-of-fee performance of passive funds."

The report looked at time periods from one year all the way up to 15 and 20 years.

Analyzing the 15-year period ended June 30, it found that large-cap fund performance had been particularly "difficult" for active managers. It found that less than half of the funds operating 15 years ago were still in business and among those survivors, only 7.1% managed to top their benchmark.

The report did find some positive news about the success of active management more recently, but even then there were more losers than winners.

It said the success rate among active U.S. equity funds surpassing their benchmark went up to 49% for the year ended June 30, up from 26% for the year ended June 30, 2016.

The report found that active U.S. midcap value equity funds saw the biggest jump in performance among all mutual funds in the year ended June 30, as 57% surpassed their benchmark, compared to 8.1% the year before.

Morningstar said small-cap funds blending both value and growth equities underperformed the most in the year ended June 30. The report found that only 32% of the funds topped their benchmark, compared to 46% in the same period a year earlier.

"Fees have been the chief culprit in explaining why active management has been unable to outperform active management," said Ben Johnson, Morningstar's director of global ETF research, in a phone interview.

He said the report did find that investors using active management will have a greater chance of success in beating the benchmark long term if they pick the funds with the lowest fees.

A copy of the report is available on Morningstar's website.