Morningstar: Active managers find value in fixed income but passives still favoured

According to Morningstar’s latest Active/Passive Barometer report

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Active managers were able to extract value with duration plays within fixed income in 2023, while passives covering the full maturity spectrum were ‘disadvantaged’, according to Morningstar’s semi-annual European Active/Passive Barometer.

However, the landscape for active management remains challenging, with a majority underperforming their passive peers over time as the advantages of lower fees become more evident.

“Notable exceptions exist within specific Morningstar categories, such as Global Equity Income and India Equity,” said Monika Calay, Morningstar director of passive manager research.

“We’ve also seen success rates increase in the emerging markets arena, with active managers benefiting from underweighting China. Meanwhile, in the fixed income space, active bond managers continued to extract value with duration plays.”

The report spans over 26,600 unique active and passive Europe-domiciled funds that account for approximately €6.9trn (£5.9trn) in assets, roughly half of the overall European fund market.

Morningstar evaluates active funds against a composite of actual passive funds rather than versus a costless index. The firm said this benchmark reflects the actual, net-of-fee performance of the passive funds available to investors.

Using this methodology, the report found that active managers’ weighted success rate over one year for the 38 equity categories examined stood at 31.2%, as of the end of December.

However, over a decade active equity managers’ success rate was ‘notably low’ at 17%.

In general, active fund managers achieved higher success in small and mid-cap equity strategies than those investing in large caps. Active managers found success in categories where passives had a strong structural bias to a particular sector or a concentrated few names, according to Morningstar.

Last year, the one-year success rate for active bond managers was 49.8%. Half of the 20 categories assessed witnessed one-year success rates of at least 50%.

However, over the longer term, Morningstar said the advantages of lower fees associated with passive funds become evident with only 23% of active bond managers able to both survive and outperform passives over the 10-year period ended in December 2023.