About 36.6% of actively managed European-domiciled equity funds outperformed their passive peers for the one-year period ended June 30, according to Morningstar's Active/Passive Barometer, a semiannual report released on Oct. 11.
This figure was up from 33.6% for the one-year period ended Dec. 31, 2022, and 30.4% for the one-year period ended June 30, 2022.
Morningstar compared the performance of funds in 43 equity categories.
Typically, success rates for active equity managers are higher in mid-cap and smaller-cap categories than in large-caps, Morningstar noted in the report.
However, active bond managers did better than their active equity counterparts — about 62.7% of active bond managers outperformed their passively managed bond peers for the one-year period ended June 30 across 24 fixed-income categories.
That figure was up from 55.5% for the one-year period ended Dec. 31, 2022, and 46.2% for the one-year period ended June 30, 2022.
While the overall recent rise in short-term success rates by active managers is encouraging, Morningstar noted in the report, passive funds dominate over the longer term. Indeed, only 17.1% of active equity managers and 23.1% of active bond managers outperformed their respective passive peers for the 10-year period ended June 30, 2023.
In addition, passive funds tend to survive longer. Over the 10-year span ended June 30, 2023, 53.7% of active equity funds survived, while 63% of index-tracking funds did so. Among fixed income vehicles, 52% of active funds survived over that period, compared with 60.8% of passively managed bond funds.
Morningstar added that the main reason that most active funds falter is due to their short lifespan, which is often attributed to their subpar performance. "This typically stems from a combination of poor stock selection and the compounded impact of higher fees compared with cheaper passive alternatives," Morningstar elaborated in the report.
Regarding the higher success rates among active fixed-income managers compared to their equity peers, Dimitar Boyadzhiev, London-based senior manager, research analyst-passive strategies at Morningstar, suggested that the main factor is that index methodologies strictly define the eligible bond universe for index inclusion.
"For example, the Bloomberg Global Aggregate index can only invest in investment-grade bonds," he said. "Historically, active (bond) managers have been able to add value by tilting toward high-yield or even higher credit quality bonds."
He pointed out that funds tracking the Bloomberg Global Aggregate index are diversified across countries, sectors, duration and credit-quality buckets. "But this diversification also means that they don't take active duration bets, and so in the current market environment, they tend to have a longer duration profile compared to their active peers," he added. "Overall, duration has been a significant negative factor especially in the government buckets of passive funds. So, it's only natural that as long duration is out of favor and short duration is in favor, effectively the bar for active managers to outperform is lower. The main appeal of actively managed (bond) funds is their flexibility to adapt to changing markets. And in the context of rising interest rates, it would have been relatively easy for active (bond) managers to shorten duration and outperform their passive peers."
The survey spanned almost 26,000 unique active and passive Europe-domiciled funds that account for about €6.3 trillion ($6.9 trillion) in assets, or about one-half of the total European fund market.