Morningstar Europe Active/Passive Barometer

Morningstar Europe Active/Passive Barometer: Active equity managers’ one-year success rate rose to 29.1% in 2024, but decade average remains disappointingly low at 14.2%

 
Morningstar has published it’s Active/Passive Barometer for EMEA – a semi-annual report comparing the performance of active funds to passive ones across European, Asian, and African Morningstar Categories.

The Barometer includes data from around 29,500 funds, covering roughly half of the European fund market. It helps investors understand the likelihood of success with active funds in various regions, considering both recent trends and long-term historical performance. The report also provides insights into how active managers have navigated past market events and their impact on performance.
 
Jose Garcia-Zarate, Senior Principal of Manager Research at Morningstar, commented:
 
“The average one-year success rate for active equity managers in the group of categories analysed rose slightly in 2024 to 29.1% from 28.7% in 2023, however over the past decade it remained disappointingly low at 14.2%. Active bond managers had a better run; their average one-year success rate stood at 53.5% in December 2024, up from 46.5% a year earlier, although it was down from 58.3% in June 2024, signalling that some of these managers were unable to adapt to quickly changing conditions in the second half of the year.

“The debate between active and passive funds continues to evolve and the overall trend toward passive investing remains strong. However, active managers have the potential to provide value in volatile or inefficient markets, which could drive investors to seek strategies designed to outperform benchmarks, particularly in sectors or regions showing signs of heightened risk.

“As active managers continue to battle high operational and regulatory costs alongside pressure to lower fees, the rise in active ETFs will continue to be a growing theme. In Europe, we’re seeing an increasing number of traditional managers jumping on the trend.”
 
Key Takeaways:
 

• Developed equity markets continued their positive run in the second half of 2024, despite a few hiccups caused by the scaling back of expectations for a fast pace of delivery of interest-rate cuts, particularly in the United States. The electoral victory of Donald Trump fuelled the momentum in the fourth quarter, with the “Magnificent Seven” tech stocks leading the way. Meanwhile, emerging markets found support on China’s announcement of a comprehensive stimulus package to address its current economy challenges.
• The active managers’ weighted success rate over one year for the 38 equity categories examined stood at 29.1% as of December 2024, up very slightly from 28.7% in December 2023. Over the past decade, the average success rate for active equity managers in the group of categories analysed remained disappointingly low at 14.2%.
• Generally, active managers tend to achieve higher success rates within mid-cap and small-cap equity categories compared with those focusing on large-cap stocks. Additionally, active managers are more likely to succeed in equity categories where the average passive counterpart exhibits a structural bias toward a particular economic sector or is concentrated on a few individual names.
• Bond markets experienced significant volatility in the last quarter of 2024. Inflation proved stickier than anticipated, and this led central banks to tone down their bearish rhetoric. This caused a spike in yields. An environment of change in monetary policy settings can be an opportunity for active managers to showcase their skills against the inflexible index-tracking approach of passive strategies. But equally, it can prove a minefield for those who are slow to react to changes, particularly if conditions become volatile, as was the case in the latter part of 2024.
• The average one-year success rate for active bond managers across the 21 categories analysed stood at 53.5% in December 2024. This was up from 46.5% a year earlier, as managers found an easy way to add value via the management of duration. However, it was down from 58.3% in June 2024, signalling that some of these managers were unable to adapt to quickly changing conditions in the second half of the year. Over the long term, the compounding benefits of low fees associated with passive funds add up also in bond categories, though not to the same extent as in equity. The average rate of success for active bond managers in the 10-year period to the end of 2024 stood at 26.0%.
• Irrespective of asset class, the likelihood of a fund’s survival is linked closely to its success rate. The primary reason most active funds falter is their short lifespan, often attributed to subpar performance. This typically stems from a combination of poor security selection and the compounded impact of higher fees compared with cheaper passive alternatives.

 
Methodology Changes
 
In this edition of the report, we’ve made two key changes to the passive composite return calculation, our benchmark to measure active fund performance. First, we have switched from an equal-weighted to an asset-weighted composite. This is because the proliferation of small, narrowly focused passive funds made the previous equal-weighted approach less representative of the investment options effectively used by investors. Second, we have adopted a buy-and-hold methodology when constructing the passive composite. This adjustment moves us closer to interpreting the passive composite return as an investable return, better reflecting the experience of real investors.

See the full report here >