Morningstar Compares Active vs. Passive Performance

The inaugural Active/Passive Barometer report shows that passive investing trumps active.

Morningstar has launched an Active/Passive Barometer to help investors measure the performance of active U.S. fund managers against passive U.S. fund managers in every Morningstar category. The barometer will indicate success rates, which Morningstar defines as the percentage of actively managed funds that survive and generate higher returns than their passive counterparts in the same time period. Morningstar will also evaluate fund fees.

Key findings from the inaugural Morningstar Active/Passive Barometer, as of year-end 2014 data, include the fact that actively managed funds underperformed passive funds in nearly every asset class and Morningstar category, especially in the 10-year period. Low-cost active funds were more likely to survive, rather than being closed or merged into another fund, and to outperform higher-cost active funds, but their returns were lower than their passive counterparts in nine of the 12 Morningstar categories.

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The U.S. mid-cap value category was the only one where actively managed funds had a 10-year success rate above 50%. In fact, low-cost active mid-cap value funds, which invest in both growth and value, had the highest success rate, at 68.2% for the 10-year period, while high-cost active mid-cap blend funds had the lowest success rate, at just under 5%.

Over the trailing three- and five-year periods, respectively, 72.9% and 69.7% of active intermediate-term bond funds beat their average passive peers. Actively managed U.S. value funds had higher long-term success rates than U.S. blend and growth funds; active large-cap value, mid-cap value and small-cap value funds had success rates of 38.2%, 54.4% and 48.4%, respectively, for the 10-year period.

Over the past 10 years, 40.2% of actively managed foreign large-cap blend funds survived and beat the average passive fund, nearly double the success rate of active U.S. large-cap blend funds.

The report also found that investors tend to select better-performing funds, as category asset-weighted returns were generally higher than the equal-weighted returns. For example, active U.S. large blend funds showed asset-weighted performance of 6.74% versus 6.42% equal-weighted performance over the trailing 10-year period.

“The active versus passive debate is a familiar one in the industry,” says Ben Johnson, Morningstar’s director of exchange-traded fund (ETF) research. “Our approach is squarely focused on the performance of actual investable options, instead of an index. We’re also replicating the investor experience by studying funds based on their category classification at the beginning of the time period, controlling for survivorship and taking into account the importance of fees.”

Morningstar will issue its Active/Passive Barometer twice a year. The full inaugural report can be seen here.

More Americans Delaying Retirement

Financial constraints are also causing many to delay a wide number of major life events.

People hamstrung by a lack of savings are delaying a wide number of major life events, such as retiring, buying a home, going to graduate school, getting married or even starting a family. This is the finding of a survey by the American Institute of Certified Public Accountants (AICPA).

Eighteen percent are delaying retirement, up from 9% in 2007; 24% are putting off higher education, up from 11%; 22% are postponing buying a home, up from 14%; 19% are delaying a medical procedure, up from 9%; 12% are putting getting married on hold, up from 6%; and 13% are delaying having children, up from 5%. Overall, 51% of Americans have postponed at least one important life decision in the past year due to financial concerns, up considerably from 31% in 2007.

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Asked specifically what kinds of financial setbacks they are facing, 60% said a lack of savings, 50% reported concerns about the U.S. economy, 39% claimed difficulty paying non-mortgage bills, and 29% cited medical bills. Other drawbacks: taking care of elderly parents (29%), paying down credit card debt (28%), the fear of losing their job (27%) and difficultly making mortgage payments (25%).

These concerns are somewhat surprising, given that many Americans say they have recently taken positive financial steps, such as improving their financial behavior since the recession (85%), following a monthly budget (58%), increasing their savings rate (44%) and contributing to an emergency fund (35%).

The findings suggest that retirement plan advisers and sponsors need to do a more rigorous job of helping people with their overall financial wellness.

If people do not have adequate savings, then their decision to delay major life events makes sense, says Ernie Almonte, chairman of AICPA’s National CPA Financial Literacy Commission. “When making major life decisions like buying a home or getting married, it’s crucial that you consider both the short- and long-term financial implications,” he says. “If you don’t have adequate savings in place or you’re having trouble paying your bills, it may make sense to hold off on major life decisions until you’re on more solid financial footing. The most reliable way to afford the costs of major life decisions is to start saving at a young age and increase your savings rate whenever possible.”

AICPA’s National CPA Financial Literacy Commission recommends that people take the following four steps to improve their financial outlook:

  1. Start or increase their savings rate;
  2. Start or continue to follow a monthly budget;
  3. Use their credit cards less frequently; and
  4. Start or add to an emergency fund.

Harris Poll conducted the survey for AICPA in March, interviewing 1,010 adults by telephone.

 

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