The Morningstar Active/Passive Barometer is a semiannual report that measures the performance of Europe-domiciled active funds against passive peers in their respective Morningstar Categories. The comprehensive Barometer spans nearly 22,600 unique active and passive Europe-domiciled funds that account for approximately EUR 3.7 trillion in assets, about one third of the total European fund market.
This year’s midyear report is particularly relevant for investors as the early-2020 volatility caused by the coronavirus pandemic should have been a once-in-a-decade opportunity for active fund managers to deliver excess returns, shielding investors from a vicious drawdown in global markets. So, did Morningstar’s Barometer report help validate, or quash, this theory?
Key takeaways from the 2020 midyear report
The report shows that only about half of active stock funds and one third of active fixed-income funds bested their average passive peer during the first six months of 2020. Although this is not hugely positive news for active managers, we are not out of the pandemic woods yet, and the economic recovery has a long way to go, so active managers have time to prove their value in times of economic uncertainty.
Investors prioritize limiting the downside risk during volatile and uncertain times, and the higher cash levels of active stock funds versus their passive peers served to cushion the double-digit drawdowns experienced in the first quarter of 2020. This partly explained these funds’ relatively higher success rates versus active fixed-income funds, which were hurt by taking on more credit risk than their passive counterparts.
When considering investment time periods longer than the past six months, European active funds’ long-term success rates are low. Over the 10 years through June 2020, the active manager success rate was less than 25% in nearly two thirds of the categories surveyed. This could suggest that active management fares better during times of significant turbulence, rather than over an entire economic cycle.
Interestingly, Morningstar pointed out that survivorship rates are positively correlated with odds for success. This means that the biggest driver of active funds’ failure is their inability to survive, which is often a result of lackluster performance. Negative performance for active funds generally has a larger effect on the funds, putting the fund’s survivability into question.
In the figure below we highlight a section from the Morningstar chart that breaks down active equity funds’ success rate by category and by timeframe. We see that European large-caps have outperformed their global and US counterparts not only YTD, but on a longer timeframe as well.
You can access and read the full Morningstar midyear report here.
