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Active Funds Failed to Beat Passive Peers in 2022: Morningstar

By Dinah Wisenberg Brin

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Fewer than half of actively managed funds outperformed their passive peers last year, challenging the notion that active funds do better in rocky markets, according to a Morningstar analysis.

“A dreadful year for stocks and bonds tested the conventional wisdom that active funds navigate difficult markets better than their passive peers. Overall, active funds did little to affirm the validity of that narrative in 2022: 43% of the active funds across the 20 Morningstar Categories included in our analysis both survived and outperformed their average passive peer,” the research firm said in its U.S. Active/Passive Barometer report.

The 43% success rate for active funds marked a decline from their 47% clip in 2021, Morningstar reported.

U.S. stock funds led the race for active managers last year, while active managers overseeing fixed income and real estate funds saw substantial declines in year-over-year success rates, the firm said.

Only 30% of fixed income active managers outperformed their passive peers, a 42 percentage-point drop from a year earlier, although active real estate and bond funds generally perform well longer term, according to Morningstar.

U.S. stock-pickers achieved a 49% one-year success rate in 2022, with active small-cap funds leading at 57%.

Morningstar also found that fees continue to matter, as the least expensive funds succeeded more than twice as often as the most expensive, with a 36% success rate versus 16% for the decade ended Dec. 31. Over that time, 67% of the cheapest funds survived versus 59% of the most expensive.

“In general, actively managed funds have failed to survive and beat their average passive peer, especially over longer time horizons; one out of every four active funds topped the average of their passive rivals over the 10-year period ended December 2022,” the report said.

Long-term success rates were generally highest among real estate and bond funds and lowest among U.S. large-cap funds.

Actively managed U.S. large-cap equity funds have generally succeeded less often than active U.S. mid- and small-cap funds, Morningstar said. Over the decade through December 2022, 10% of active large-cap funds survived and outperformed their average passive peer, while actively managed mid- and small-cap funds hit 26% and 36% success rates, respectively.

(Image: Shutterstock)

Dinah Wisenberg Brin

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