In a significant shift, over half of U.S. actively managed mutual funds and ETFs have outperformed their average passive counterparts in the year ending June, according to a recent report by Chicago-based research firm Morningstar. This marks a notable increase from 43% in the calendar year ending December 2022.
The comprehensive study, which incorporated 8,212 funds and ETFs representing around $17 trillion in assets or approximately 55.9% of the U.S. fund market as of June 30, showed that active funds excelled across multiple asset classes and nearly all categories monitored by the firm. The only category not keeping pace was corporate bond funds, with just 40% outperforming passive rivals during the same period.
Active small-cap funds led the way with a success rate of 65%, outpacing the 56% of active mid-cap funds and 53% of active large-cap funds. These figures represent an increase from the previous year's rates, which were 55.8%, 49%, and 39% respectively for each category. Active small-cap funds typically enjoy higher long-term success rates due to their market being "relatively less liquid and efficiently priced."
The most significant annual change was observed in active funds focused on international stocks. Over 63% of these funds surpassed their average passive peer, marking a surge of 30 percentage points from the previous year. The foreign-large-cap-value category led this trend with a success rate of 75%, the highest for any equity category.
Active bond funds also demonstrated strong performance this year, with 55% beating the passive average, a substantial increase from 30% in June 2022. Active intermediate core bond funds, which typically assume more credit risk than indexed peers, likely benefited from this trend.
However, despite these impressive short-term results, the long-term track record of active funds remained largely unchanged. Only one in four active strategies managed to outperform their average passive counterparts over the decade ending June 30. Long-term success was higher among foreign equities, real estate, and bond funds, while U.S. large-cap funds recorded the lowest rate.
The report also highlighted a correlation between fund expense and performance. Approximately 31% of active funds in the cheapest quintile surpassed their average passive peers compared to only 19% in the most expensive quintile, indicating that less expensive active funds tend to outperform more costly ones.
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