Thursday 28 Mar 2024
By
main news image

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on May 2 - 8, 2016.

 

Passively managed funds have generally outperformed their actively managed peers over the longer term and experienced lower mortality rates through mergers and closures, according to Morningstar’s Active/Passive Barometer, released last month. The semi-annual report revealed that most actively managed funds do not survive and outperform their passive peers, particularly over the trailing 10-year period.

“The average dollar in passively managed funds typically outperformed the average dollar invested in actively managed funds. Investors would have substantially improved their odds of success by favouring inexpensive funds, as evidenced by the higher-than-average success ratios of the lowest-cost funds across most categories,” according to the report.

The report also found that failures of actively managed funds are more likely to be positively correlated with fees and that the possibility of lower-cost funds lasting and being successful is higher. In all instances, investors who chose funds from “the highest-cost quartile of their respective categories” reduced their chances of success.

“The diversified emerging-markets category is the starkest example. The lowest-cost funds in this category had a success rate that was 18.8 percentage points higher than the success rate for the category as a whole during the decade ended December 2015.

“The highest-cost mid-value funds had a success rate of just 23.5% during this same time span, which is less than half that of the lowest-cost funds and about half that of the category as a whole,” the report said.

Among the different types of actively managed funds, Morningstar researchers said that value managers had higher chances of long-term success, whereas the lowest-cost mid-value funds enjoyed the greatest long-term odds of success (53.6%) and the highest-cost mid-blend funds the lowest (5.6%).

Small-cap, mid-cap, foreign, and intermediate-term bond funds typically enjoyed long-term success rates compared with US large-cap funds. Actively managed diversified emerging-markets funds had the highest 10-year survivorship rate (77.5%) of any category that was studied.

“The success rates of active funds improved in eight of the 12 categories we examined versus 2014. The small-value category saw the most meaningful improvement, where active funds’ success rate nearly tripled, rising to 66.7% in 2015 versus 23.7% in 2014.

“Actively managed large-cap value and growth funds also enjoyed higher success rates in 2015. On the flip side, active small-growth managers saw the biggest comedown — the success rate of those funds fell 29.3 percentage points to 22.3%. The long-run patterns we see in the data are largely similar to those we highlighted in the first and second installments of this study, which were published in June and December 2015.”

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share