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Funds

Where do active managers add value?

Morningstar’s inaugural report comparing active and passive funds in Australia has uncovered where funds prove their worth to investors.


There has been much ado about active vs passive investing, notably do active fund managers outperform given that they typically charge higher fees.

Active funds typically invest to beat their benchmark while passive managers track an index. On average, active funds have attracted fees of 0.53 per cent compared with their passive peers, which are on an average of 02.3%

An inaugural Morningstar report which measured the performance of active fund managers against their peers has revealed that some active fund managers have indeed proved their worth. Here it is important to note that the report assesses past data and not future returns.

These retrospective findings were based on the Australian Active/Passive Barometer which compared the performance of active funds to their passive counterparts within their respective Morningstar Categories. The performance was based on trailing three-year, five-year, and 10-year periods (ending June 30, 2023).

The study spans over 700 open-ended strategies (around 3,000 share classes including exchange-traded funds) based in Australia.

“We see that active management in global bonds shows its worth as interest rates undergo a regime change,” Morningstar senior analyst and co-author of the report Zunjar Sanzgiri said.

According to Sanzgiri the actively managed funds in Australian mid/small blend category also excelled.

However, passive funds did shine in the world large blend category.

Actively managed global bonds deliver

Taking a closer look at global bonds, Morningstar’s research revealed that active funds had the flexibility to adapt to changing markets such as the current rapid high-rate environment. This is because these funds have the flexibility on setting duration and credit exposure.

“Duration measures interest-rate sensitivity, namely, the longer a fund’s duration the more sensitive it is to changes in interest rates,” notes Sanzgiri.

Active bonds

Because active bond funds have this in their tool kit, they were able to significantly outperform passive funds over the past three years in a rising interest-rate environment.

“However, the active global bond funds also beat their passive competitors over longer time periods. Of the 14 active strategies that survived over the 10-year period, nine strategies outperformed the passive composite—a success rate of just over 64%,” Sanzgiri says.

Small is beautiful

Similarly small to mid-cap active funds also outperformed their passive peers.

“The results support the Morningstar view that indexes tracked by passive funds in the Australia mid/small blend category, particularly the S&P/ASX Small Ordinaries, are not as efficient as they are in the other categories,” Sanzgiri says. Small to mid-cap fund managers can exploit market inefficiencies, thereby adding value for investors.

Managers of these funds are able to source upcoming businesses that are eyeing a listing, so can hunt for attractive growth opportunities.

“Notably, the gap widens as we look at longer time periods with a rising excess return and success rate for the active funds, standing at a success rate of almost 87% over a 10-year period,” adds Sanzgiri.

Five year returns

Where do passive funds add value?

Passive funds that invested in large businesses both with a value and growth tilt held the advantage over active funds. “The level of outperformance of the passive funds may vary depending on the time period and the prevailing market conditions,” Sanzgiri notes.

However, Sanzgiri noted that most active managers struggled to make up for the difference in fees compared with the passive funds. The world large blend opportunity set is dominated by U.S. equity exposure which forms around 70% of the category index (MSCI World ex Australia Index). “The US equity market is highly efficient and liquid, which makes it an uphill task for active managers to add value on a consistent basis.”

Five year returns

 



 



© 2023 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This report has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or New Zealand wholesale clients of Morningstar Research Ltd, subsidiaries of Morningstar, Inc. Any general advice has been provided without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782.

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