Chart of the Week: Active or Passive? The results may surprise you
Why manager selection still matters.
This week’s insights come directly from our manager research team in Morningstar’s Australia Active/Passive Barometer update.
Manager selection remains key
The report found that passive strategies outperformed active peers across most segments over the past year, leading to a decline in trailing 10-year success rates across much of the study. Even so, top-quartile active managers in seven of the nine categories delivered positive excess returns over the decade, demonstrating that opportunities for outperformance remain available. However, these opportunities are increasingly concentrated among a select group of active managers.
The study gauges how the average dollar invested in active funds has fared versus the average dollar in passive funds within the specified categories across various time frames. The distribution of active funds’ excess returns versus their average passive peer indicates not just the odds of picking a successful manager but also the prospective payout or penalty.
Key takeaways for investors
The report highlighted that the Australia mid/small-blend category showed active management enjoying a durable advantage across multiple market environments supported by persistent market inefficiencies. Active managers have often been able to add value through a disciplined application of basic quality and valuation filters.
More recently, the equity-income category demonstrated how quickly leadership can reverse. Dividend oriented passive strategies significantly outperformed active peers over the past year, resulting in a sharp deterioration in active manager outcomes and contributing to weaker success rates across even the longer-term evaluation periods.
These examples underscore that while some active-passive outcomes are driven by enduring structural characteristics of the underlying market, others remain heavily influenced by prevailing market conditions and can change significantly over time.
Overall, the results from this report reinforce that long-term success in active management requires managers to both outperform and endure. In this respect, passive strategies retain a notable advantage, consistently exhibiting higher survivorship rates than active peers.
