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To follow up on a recent post by Steve Abramowitz:
A Morningstar article published 3/11/25 addressed this subject looking at performance over the past 10 years.
It found that less than one out of every four active funds topped the average of their passive rivals over the 10-year period ended December 2024.
Long-term success rates were highest among bond and real estate funds.
The prospective payoff for choosing a winning fund versus the penalty for picking a loser.
In the case of US large-cap funds, the distributions skew heavily negative.
The opposite tends to be true of fixed-income and real estate categories, where long-term success rates have generally been higher and excess returns among surviving active managers have skewed positive over the past decade.
Finally Morningstar found that funds in the cheapest quintile succeeded more often than funds in the priciest one (28% success rate versus 17%) over the 10 years through 2024.
Morningstar has reported innumerable times that lower cost funds almost always outperform higher cost ones. With so many funds in so many investment categories available, why would anyone pick the high cost fund?
As Jack Bogle was fond of saying, “you get what you don’t pay for”.
David, a great informative follow-up.
But I’m perplexed about one finding in both reports. Active bond funds did relatively well. Why should this be since bonds are less variable than stocks and so managers presumably have less wiggle room to outperform? This seems counterintuitive to me because active bond funds’ higher expenses should then be the deciding factor in determining (and inhibiting) their performance. Hence, why not an advantage in favor of passive funds?
Maybe it’s that style drift phenomenon again. Might some managers have “cheated” by sometimes going out on the yield curve as interest rates came down (so raising bond prices) over the last 10 or so years? Will someone please help me with this, so I can get some peace!
Steve, I have a vague memory of a HD writer writing of the possible advantage of an active bond fund over an index. I’ve searched but can’t turn it up, and I won’t name the writer in case my memory is just imagination. Perhaps a nimbler brain can assist.
Whenever you see these “success rates” for active managers, it’s important to consider the impact of “style drift,” also known as “cheating.” Style drift was a bad strategy for large-cap managers over the past decade, because large caps fared so well. Meanwhile, buying some larger companies would have been a plus for small-cap managers when their results are compared to a small-cap index.
The opportunities for style drift are especially large for bond managers. Bond market indexes contain just a fraction of the bonds in any one market sector. Thus, managers can potentially goose returns by holding bonds that are lower quality or longer maturity than those included in the index.
Don’t active mutual funds cheat when they practice “window dressing?”