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Active funds show ‘superiority’ in certain categories: Morningstar

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The research house has identified a number of categories in which active funds have performed better than their passive counterparts.

Active global bond funds have demonstrated “significant outperformance” over their passive peers in the past three years, according to the inaugural Australian Active/Passive Barometer from Morningstar.

The research house noted that, while this observation was “not surprising” in a rising interest rate environment, active has also beaten passive in the longer term, with nine out of 14 active strategies outperforming the passive composite over a 10-year period.

Morningstar senior analyst Zunjar Sanzgiri and associate director Justin Walsh said that this outperformance offset a “lengthy period of underperformance” seen in previous years.

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“Over the last few years, the rapidly rising interest-rate environment in developed markets has resulted in a strong period of relative performance for the average active fund versus the average passive fund,” they said.

“Overall, both resulted in a negative return. However, this category illustrates that the flexibility of active managers versus passive funds can lead to a meaningful upside over the long term.”

Within the bonds – global category, active funds delivered an average annual return of -3.2 per cent over three years, -0.1 per cent over five years, and 2.2 per cent over 10 years.

This compared to the passive funds in the category, which had an average return of -5.1 per cent over three years, -0.3 per cent over five years, and 2.1 per cent over 10 years.

Meanwhile, Mr Sanzgiri and Mr Walsh suggested that the results for funds in the Australia mid/small blend category were also “encouraging for active managers”.

“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,” they said.

Over 10 years, nearly 87 per cent of active funds in the category outperformed the passive composite.

Active funds had an average annual return of 8.8 per cent, 6.2 per cent, and 10.1 per cent over three, five, and 10 years, respectively. Over these same time frames, passive funds generated an average return of 7.5 per cent, 3.9 per cent, and 7.2 per cent.

“The outcomes in the Australia mid/small blend category show clear and consistent dominance of active funds in this segment, outperforming their passive counterparts across the three-, five- and 10-year periods by a substantial margin,” said Mr Sanzgiri and Mr Walsh.

In contrast, the report also highlighted that a passive approach “holds the upper hand” when it comes to the world large blend category.

While the level of outperformance of passive funds in this category can vary through different time periods and market conditions, Morningstar noted that most active managers struggled to make up for the difference in fees when compared to their passive peers.

“The world large blend opportunity set is dominated by US equity exposure which forms around 70 per cent of the category index (MSCI World ex Australia Index),” Mr Sanzgiri and Mr Walsh noted.

“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.”

Just under 44 per cent of active funds in the world large blend category outperformed their passive counterparts over a 10-year period.

Active funds delivered an average annual return of 11.1 per cent over three years, 8.9 per cent over five years, and 11.6 per cent over 10 years.

Meanwhile, passive funds had an average annual return of 13.2 per cent, 10.4 per cent, and 12.0 per cent over three, five, and 10 years, respectively.

“The study reinforces some of the long-held Morningstar views such as the superiority of active funds in categories like Australia mid/small blend and Australia large value equities, whereas low-cost passive funds remain dominant in efficient markets when representative indexes are available,” stated Mr Sanzgiri and Mr Walsh.

Active funds show ‘superiority’ in certain categories: Morningstar

The research house has identified a number of categories in which active funds have performed better than their passive counterparts.

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Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.

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