European stock-pickers' long-term success rates are low. Active fund managers beat their average passive peer in just three of the 49 European-domiciled categories over the decade to the end of December 2018.
According to the Morningstar European Active/Passive Barometer, which examines 10,200 active and passive funds over the 10 years to the end of 2018, active managers' success rates were less than 25% in nearly two thirds of the categories surveyed.
And recent performance is even worse – active managers' success rates declined during the one-year period ended December 2018, relative to the one-year period ended in June 2018.
Active funds' 10-year success rates in the largest equity categories, as measured by assets under management, are among the lowest of all the categories we examined. A small percentage of managers have achieved long-term success in the Europe large-cap blend, global large-cap blend, and global emerging-markets categories – between 9.3% and 31.6% depending on the category.
The same subpar result is echoed across the two largest ex-Europe single-country categories—US large-cap blend and Japan large-cap—in which active managers achieved success rates of just 9.5% and 13.7%, respectively.
Where Do Fund Managers Earn Their Fee?
Active managers fared better in some categories than others. For example, UK mid-cap managers have continued their winning streak. Two thirds of active funds available to investors in this category 10 years ago both survived and outperformed their average passive peer over the ensuing decade. Similarly, success rates in the Switzerland small/mid-cap category inched up from 46.9% to just above 50%.
The only fixed-income category where most active managers bested their average passive peer is EUR corporate bond, where the 10-year success rate for active funds climbed to 59.5% from 44.4%.
Survivorship rates are positively correlated with odds for success. One of the biggest drivers of active funds' failure is their inability to survive, which is often a result of lacklustre performance.
Comparing mortality rates between active and passive funds shows that the latter have had better odds of survival over the long term. The contrast is starker over longer lookback periods.
Active fixed-income managers' success rates have remained low. Over the past decade, less than a fourth have managed to both outlive and outsmart their average passive peer in nine of the 12 categories we studied.
How Analysts Crunch the Data
The Morningstar European Active/Passive Barometer is a semi-annual report that measures the performance of European-domiciled active funds against passive peers in their respective Morningstar Categories.
The Active/Passive Barometer measures managers' success in several ways:
It evaluates active funds not versus a costless index but against a composite of actual passive funds. In this way, the "benchmark" reflects the actual, net-of-fees performance of passive funds.
It considers how the average unit of currency invested in various types of active funds has fared versus the average unit of currency in the passive composite.
The Active/Passive Barometer is also comprehensive, spanning approximately 10,200 unique active and passive European-domiciled funds that account for approximately €2.8 trillion in assets, or about one third of the total European fund market.
All told, the Active/Passive Barometer is a useful measuring stick that can help investors better calibrate the odds of succeeding with active funds in different areas based on recent trends and longer-term history.
