Active and passive investing strategies. Morningstar review.

Sergey Gurov

Sep 19, 2023

According to the data presented in the semi-annual Morningstar’s U.S. Active/Passive Barometer report, from the second half of 2022 to the first half of 2023, about 57% of actively managed equity funds demonstrated higher returns compared to their passive counterparts. Moreover, a similar result is recorded for bond funds and real estate funds. During the specified time period, active investment strategies in the U.S. stock market outperformed passive strategies in all market capitalization segments: small-cap, mid-cap, and large-cap. Active equity investment funds provided investors with higher returns outside the U.S. as well.

As statistics show, the size of the fees that investors pay to a fund manager with an active strategy is not an indicator of future success. Since July 2013, funds with minimal fees (top 20% cheapest) have more often outperformed passive counterparts than funds with the highest fees (top 20% most expensive). Analysts also note that over the past 10 years, investors on average invested in successful active investment funds (i.e., achieved returns higher than the average fund) in 19 out of 20 Morningstar categories. Nevertheless, over this ten-year interval, passively managed funds demonstrated higher returns: in 75% of cases, they outperformed actively managed funds.

Source: Morningstar