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Rula Khalaf, editor of the Financial Times, selects her favorite stories in this weekly newsletter.
In an uncertain world, you can always count on Alphaville. Whenever there's a study covering active portfolio management, we'll be here to cut and paste.
Today's active management comes from Morningstar. Twice a year it publishes an active/passive metric that measures active funds using a composite of passives rather than an index. The idea is to reflect the investor's costs, which indices do not, and capture the true composition of individual portfolios.
For 2023, just over 31 percent of active managers outperform their related passive composite, Morningstar found, meaning nearly 69 percent did not.
The poor performance means that nearly half of active funds die within a decade. But even if survival bias is ignored, the long-run profit-loss ratio is still well below 50%.
Once closures are taken into account, only 17 percent of funds outperform over ten years:
Active managers performed better compared to passive managers during the China-led stock market selloff of 2015-2016, the all-around rally of 2021, and the 2018 bear market typically attributed to early concerns about monetary policy tightening. Trading stocks and bonds last year performed fairly poorly:
One perhaps counterintuitive theme that emerges from the data is that focus is good, as long as it's the right kind.
Big Tech's focus on the US market has been the wrong kind. Having a market where only seven stocks are counted toward the final results is very inconvenient for stock pickers. But “active funds are more likely to succeed in stock classes where the average passive counterpart shows a structural bias toward a particular economic sector or focuses on a few individual names,” Morningstar says.
It highlights Indian stocks, where the one-year and 10-year success rates for active managers are 64 per cent and 54 per cent, respectively.
Since Indian passive equity funds are mostly large-cap, active managers have an opportunity to represent the sweep of the broader market, says Morningstar. What was not explicitly stated was that the negatives were carrying some absolute dogs, including the Adani group of companies, and even the sleepiest of managers had spotted some red flags on Adani last January.
The same dog-avoidance advantage may have contributed to the activists' victory over the passives last year in Denmark, where selling Ørsted and Genmab at the first smell of trouble while retaining Novo Nordisk ensured outperformance. Finland, which was among the worst-performing markets in Europe in 2023, proved similarly easy for equity pickers because it was easy to avoid large exposures to Russia and China.
Morningstar has placed its 2023 Active/Passive Benchmark report outside the paywall. If you're an out-of-work fund manager shopping in a market where bad things are easily identifiable, but would be too big to fall out of passive portfolios, it's a good read.
