How do active funds perform?
- Robin Powell
- Jul 22, 2024
- 2 min read
Active funds promise market‑beating returns through clever stock‑picking and timely trades. Yet the evidence shows that very few deliver.
Morningstar’s long‑running Active/Passive Barometer tracks thousands of US and international funds, grouping them by style and judging each against an appropriate benchmark. Its findings echo the S&P Dow Jones SPIVA scorecard: most active managers underperform, and many disappear before a full market cycle has passed.
Over the last decade, only about one in eight US large‑cap active funds both survived and outpaced its benchmark. Results improve slightly in smaller‑company and international categories, but still hover close to a coin‑flip. Picking tomorrow’s winners in advance is therefore extremely difficult.
As Morningstar’s JEFFREY PTAK explains in this video, cost is the one factor investors can control, and it makes a big difference. Lower fees leave more of every pound working for the investor and reduce the performance hurdle managers must clear.
KEY TAKEAWAYS
1. Most active funds lag their benchmark
Morningstar’s Active/Passive Barometer finds that barely 10 – 15 percent of US large‑cap active funds survived and beat the index over ten years. Similar patterns appear worldwide, underscoring how tough consistent outperformance is.
2. Category matters, but odds are still poor
Success rates rise a little in small‑cap and international niches, yet rarely top 50 percent. Even when conditions favour active management, choosing a future winner ahead of time remains largely guesswork.
3. Low fees improve your chances
When active funds are sorted by cost, the cheapest quintile often outperforms the priciest by two‑to‑one or more. Expense control is therefore the single most reliable lever investors can pull — and passive funds set the standard for low cost.
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