Active funds still struggling against passive peers, Morningstar says

Actively managed funds continued to lag behind their passive counterparts in 2024, with less than half of them outperforming comparable index funds, according to Morningstar’s latest US Active/Passive Barometer. While active bond and real estate funds saw notable success, active equity managers struggled to keep up, particularly in large-cap categories.

The report, which analyzes nearly 9,300 unique funds covering about 68 percent of the US fund market, found that only 42 percent of active funds beat their passive rivals in 2024. Long-term results were even more challenging for active managers, as less than one-fourth of active funds outperformed over the past decade.

“The US large-cap equity market has been a difficult place for active funds to succeed in the long run,” Morningstar's latest report stated. “Just 7 percent of them survived and beat their average passive rival over the decade through December 2024.”

Some bright spots for active funds

While the overall performance of active funds was mixed, certain asset classes provided better opportunities for active managers. Fixed-income strategies were a standout, with 63 percent of active bond funds surpassing their passive peers in 2024, a sharp rise from 48 percent in the previous year.

Active intermediate core bond managers had the highest success rate in the bond space, with 79 percent outperforming their average passive peer. That outperformance, Morningstar said, could be chalked up to active managers’ ability to take on additional credit risk in a market where narrowing spreads worked in their favor.

Real estate was another area where active managers shined. Sixty-six percent of actively managed US and global real estate funds outperformed in 2024, up 6 percentage points from the prior year. Over the past decade, 47 percent of active real estate funds outperformed passive strategies, making them one of the most resilient categories for active managers.

The report also found active managers doing slightly better in the small-cap space, with 43 percent of active small-cap funds outperformed passive competitors in 2024 – the highest among US equity categories.

Large-cap active funds continued to lag

Despite isolated bright spots, active management fell short in many key areas, particularly among large-cap funds. The report found that just under two-fifths (37 percent) of large-cap fund managers outperformed their passive peers in 2024. Over a ten-year period, the success rate was even lower, as only 5.7 percent of large-blend funds beat their passive benchmarks.

Those numbers closely mirror the latest read from the SPIVA US scorecard, which found two-thirds (65 percent) of all active large-cap US equity funds underperformed the S&P 500, doing slightly worse than in 2023 when 60 percent of active large-cap strategies lagged the index. That was also roughly in line with the 64 percent average annual rate of large-cap fund outperformance seen in the 24-year history of SPIVA scorecard tracking.

"Across asset classes, underperformance rates typically rose as time horizons lengthened," researchers from S&P Dow Jones Indices said of the SPIVA scorecard. "Over the 15-year period ending December 2024, there were no categories in which a majority of active managers outperformed."

Active large-growth funds have faced particularly Darwinian conditions. According to Morningstar, only 1 percent of large-growth funds that existed two decades ago both survived and outperformed their passive counterparts.

“The median 10-year excess return for surviving active funds was negative across all three US large-cap categories,” the report noted. “Not only was the likelihood of picking a successful manager low, but the penalty for poor manager selection tended to be far greater than the reward for choosing a winner.”

Mid-cap funds also struggled, with active mid-cap managers seeing their success rate decline by 8 percentage points from 2023 to 2024. Active mid-cap value funds were particularly weak, with a 35-percentage-point drop in success rate year over year.

Lower-cost funds more likely to succeed

Fund fees remained a major predictor of long-term performance, with lower-cost active funds consistently outperforming higher-cost ones. The report found that 28 percent of the cheapest active funds outperformed their passive peers over 10 years, compared to just 17 percent of the most expensive funds.

In large-cap equity categories, fees were a particularly significant hurdle. Among the priciest large-cap funds, only 1.3 percent outperformed their passive benchmarks over the past decade, while 13 percent of the cheapest large-cap funds managed to do so.

The study also found that investors have tended to allocate their assets wisely. Over the past decade, the average dollar invested in active funds has outperformed the average active fund in 16 of the 20 categories studied, suggesting that investors have favored lower-cost, higher-quality options.

A mixed bag for foreign fund outperformance

Active managers investing in international equities faced increasing headwinds, with foreign stock funds collectively seeing their success rate drop 14 percentage points to 40 percent in 2024. The decline was most pronounced in emerging markets, where the success rate for active funds fell 36 percentage points to just 22 percent over the year.

The report noted that active managers in diversified emerging-markets funds have had some of the lowest long-term survivorship rates, with just over half of them lasting a decade.

However, certain regions showed improvement for active strategies. Europe-focused active funds saw their success rate climb to 47 percent, up from just 12 percent the previous year, marking one of the largest one-year increases of any category.

Foreign-stock funds have historically had a slightly better track record than their US counterparts over the long run. While only 15 percent of US active equity funds outperformed over the past decade, 27 percent of foreign-stock funds managed to do so.