Chart of the Week: Where active managers outperform their passive peers
Our latest Active/Passive Barometer report.
This week’s chart comes from the latest release of the Australian Active/Passive Barometer report.
This measures the performance of active funds against passive peers in their respective Morningstar Categories across various time frames.
Approach
There are two key metrics we use for determining the efficacy of active funds:
- Excess Return: The difference between the average return of an active fund and the average return for a passive fund in a particular category over the specified period.
- Success Rate: The proportion (by count) of active funds outperforming the passive composite, over the various periods, provided the active fund has survived through the period.
Key takeaways
Passive strategies outperformed their actively managed counterparts across the majority of the segments over the past year, contributing to a decline in 10-year trailing success rates across most categories.
Overall, passive strategies continue to demonstrate consistently higher survivorship rates compared with active peers. Even in categories where active managers exhibit stronger success rates, lower survivorship* can significantly diminish the likelihood of investors realising those potential return advantages over the long term.
Winner: Australia Mid/Small Blend
Active managers maintain clear dominance within this category, supported by their ability to exploit pricing inefficiencies in relatively under-researched segments of the market.
Another key distinction lies in the construction of the underlying benchmarks. The tracking indexes for passive strategies in this category employ relatively narrow inclusion criteria, whereas active managers operate within a broader opportunity set, providing greater scope to generate excess returns.
Despite their lower fee structures, passive funds materially lagged the average active manager across all evaluation periods. Notably, the magnitude of excess returns and success rates for active strategies tend to strengthen with longer investment horizons.
*To calculate survivorship, we divide the number of distinct strategies that started and ended the period in question by the total number of funds that existed at the onset of the period in question (the beginning of the trailing one-, three-, five-, and 10-year periods).
You can find previous editions of Chart of the Week here.
