Long-term success rate for active managers ‘notably low’

Around a fifth of equity and bond managers survived and outperformed over the past decade

Jamie Gordon

Active managers around a table

The well-documented active manager struggle to beat index investments has been further evidenced by “notably low” success for managers despite some bright spots, according to research from Morningstar.

The Morningstar European Active-Passive Barometer 2023 revealed just 31.2% of active equity managers beat their average benchmark return across 38 categories during a year of AI exuberance and hopes of an end to monetary policy hawkishness.

While under a third of stock pickers beating index investments sounds bleak, this number fell to 17% for the trailing decade.

In the world’s largest stock market, active managers enjoyed a relatively strong year with 41.9% outperforming their competitors in the US large-cap blend category, however, this number fell to just 6.3% when looking back over a 10-year period.

A similar story played out in emerging market equities, where 46.3% outperformed by side-stepping the large China exposure seen across conventional emerging market benchmarks, yet only 27.4% managed to maintain winning form over a 10-year period.

Pockets of performance

Notably, there are select exposures where most active managers manage to outperform. For instance, 62.2% of active global dividend strategies beat their benchmarks in 2023, with more than half – 52.3% – keeping winning form over the past decade.

Similarly, diving into emerging market single countries, 64.2% and 53.5% of India stock pickers beat their benchmarks over the past one and 10 years, respectively.

“Generally, active managers tend to achieve higher success rates within mid-cap and small-cap equity categories compared with those focusing on large-cap stocks,” the report explained.

“Additionally, active funds are more likely to succeed in equity categories where the average passive counterpart exhibits a structural bias toward a particular economic sector or is concentrated on a few individual names.”

However, even these pockets of success remain tenuous. Active managers have found a home within UK small cap equities and 63.5% of UK large cap managers managed to beat passive indices in 2023 amid poor UK equity performance, however, this number fell to 20.5% over the past decade.

Fixed income success fleeting

A similar trend has also played out across fixed income categories, where 49.8% of active managers managed to outperform across 20 categories.

While 64.5% of euro credit and 62.1% of hard currency emerging market debt managers beat their benchmarks in 2023, this number falls to 43.5% and 26%, respectively, over the trailing 10 years.

“Active bond managers continued to extract value with duration plays, while passive peers covering the full maturity spectrum remained at a disadvantage, particularly so in the first half of the year,” Morningstar said.

“However, over the long term, the advantages of lower fees associated with passive funds become evident.”

Overall, just 23% of active bond managers survived and outperformed the mean average passive return over the decade ended December 2023.

Reflective of the investor experience?

While much has been said of active managers’ inability to beat benchmarks, some managers contest popular research such as Morningstar’s barometer and S&P Dow Jones Indices’ (SPDJI) SPIVA scorecard do not represent the outcomes of investors in active strategies.

For instance, Morningstar’s ‘success rate’ examines what percentage of funds survive and generate excess returns versus the equal-weighted active passive return over a given period, however, most investor assets in active funds tend to be dominated by a handful of managers within each exposure, rather than being spread evenly across the pack.

Simon Evan-Cook, fund manager at Downing, previously said: “Most fund sectors are dominated by a few behemoths.

“These funds have a far greater impact on investors’ wealth than the ‘average fund’, the calculation of which assumes all funds are evenly sized.

“To gauge whether fund holders are collectively ‘beating the market’, we should take fund size into account by using weighted averages.”

Whether the assets tracking these ‘star managers’ can outweigh the laggards in each exposure – and whether they can maintain consistent outperformance across asset classes over the long-term – warrants further investigation.

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