A new report from Morningstar tells a traditional story: actively managed funds underperform over the short and long-term, especially high-cost actively managed funds.
The third edition of the Morningstar Active/Passive Barometer, first issued last June, compared the investment returns and survival rates of actively managed mutual funds and ETFs to their index fund counterparts in multiple investment categories over one, three, five and 10 years. Only among diversified emerging market funds did the active funds outperform the passive.
Close to two-thirds of the active diversified EM funds outperformed their passive counterparts over the one- and three-year periods ended June 30, and just over 50% outperformed over five years. Longer term their success rates lagged overall – less than one-third of these funds outperformed — but it was a different story for the cheapest among them.
More than 60% of the lowest cost actively managed diversified emerging market funds outperformed their index fund counterparts over the 10-year period, while less than 12% of the highest cost funds in that category did.
"Fees matter," according to the Morningstar report. "They are one of the only reliable predictors of success." Investors improve their odds of success "by favoring inexpensive funds, as evidenced by the higher – than average success ratios of the lowest-cost funds across most categories," according to the report. Moreover, according to the report, investors reduce their odds of success when choosing among the highest cost actively managed funds. There are exceptions, however. Over the 10-years ended June 30, 2016, highest cost mid-cap blend and small-cap value funds outperformed their lowest cost counterparts.
Actively managed diversified emerging market funds also led in another analysis in the report. They, plus U.S. small blend funds, were the only actively managed fund categories whose performance improved year-over-year through June 30, 2016.
The performance of actively managed diversified emerging markets funds improved by almost 22%, while the performance of small-cap blend funds improved by 10%.
