Active Strikes Back: Early Signs of Active Management Proving Its Worth

Mark Webster, CFA – Senior Investment Research Analyst
Chris Kamykowski, CFA, CFP® – Head of Investment Strategy and Research

The last decade has not been kind to those arguing for active management within investment portfolios, as the cohort has trailed their passive fund brethren during a period where fundamentals mattered little to markets. Helped by consistently low rates, whereby “any” company could survive despite an inability to generate consistent earnings, passive funds led the way and at a substantially lower cost versus active managers. That said, while still early to declare any victory, we are beginning to see active management regain leadership with the regime change in monetary policy ongoing.

The debate between active and passive management of investment portfolios has been ongoing for quite some time and each side in the debate has an evidence-based list of justifications. Proponents for passive management argue that the efficiency of information priced into markets creates a tough hurdle for active managers to consistently outperform the passive benchmarks. One would be hard-pressed to argue against the efficient market hypothesis when observing the data from the Global Financial Crisis through mid-2023 and as stated in Morningstar’s recent Active/Passive Barometer Report, just one out of every four active strategies survived and beat their average passive counterpart over the 10 years through June 2023.[i] Additionally, passive mandates generally provide broad diversification, in terms of the number of holdings, and substantially cheaper costs relative to active funds.

On the flip side, active managers will concede the recent past has not been favorable for much of the peer group as information has become instantly reflected in prices even as investment managers are increasingly well-trained and have access to improved data and analytics to aid in security selection and sector allocation decisions. Many managers will also agree that some asset classes offer a more limited opportunity to extract alpha consistently and at an appropriate level to justify the active fees; this is mainly due to the impact of the rapid pricing of information, or the general efficiency, in certain asset classes.

As noted, though, the impact of a post-pandemic world and rapid change of the interest rate environment has upended the foundation that passive management stood upon to buttress its leadership over the last decade. A world of near-zero rates allowed many companies to survive through cheap financing, well beyond what typical corporate fundamentals would typically have justified. Over the past year, interest rates have risen sharply, working their way through all corners of the economy with “long and variable lags”; this is providing active managers an opportunity to reestablish the justification for their approach. The basic corporate fundamentals many active managers point to as support for their rationale for active security selection and sector allocation, may have risen back to their proper prominence. This provides the potential opportunity for active management to reestablish itself as a worthy competitor to passive management.

A recent report from Morningstar highlights this unfolding dynamic. The report showed the “success rate”, or the percentage of active funds within an asset class category outperforming passive funds in the same category, has improved for active managers on a net-of-fee basis for the one-year period ending June 2023.[ii] For the sake of clarity, we omit the World Large-Blend and Europe Stock from our observations, as those are not categories we currently recommend. Nearly 89% of the remaining 18 active categories included had a success rate of at least 50% versus the passive cohort over this period. This essentially means, over the previous 12 months through June 2023, an investor would have had better odds of outperforming by selecting an active manager as opposed to a passive manager in each of the represented categories. This general trend has been building over the last couple of years and broadening across categories; post-pandemic the overall average success rate has risen to 48% versus the 36% rate seen from 2012-2020.

*Through June 30th, 2023. Average of one year success rates across 18 public market categories. Asset Class Categories included: US large blend, US large value, US large growth, US mid blend, US mid growth, US mid value, US small blend, US small growth, US small value, foreign large blend, foreign large value, foreign small-mid blend, emerging markets, US real estate, global real estate, intermediate core bond, corporate bond, and high yield bond.


Does this one report mean active is back and ready to return to a more durable, leading position relative to passive management? It is possible and from today’s perspective, one can argue the environment appears to be moving to a more conducive one for skilled active management to have better success versus passive funds. Ultimately, though, time will tell how the battle between active and passive management will unfold.

Regardless, at Moneta, we are well-informed of the pros and cons that come with both active and passive investment management as each approach has its own merits and will rotate through their day in the sun as markets shift and economic cycles evolve. Importantly, we believe active management can add value in certain market segments and, by employing a rigorous and disciplined manager due diligence effort as a foundation, we can attempt to identify those select investment managers with a higher probability for success. While active may be seeing a bit of sunlight today, who is winning between the two approaches matters less than seeking the right combination of active and passive funds to put portfolios in a position for long-term success.



[i] Morningstar’s U.S. Active/Passive Barometer: Midyear 2023. Accessed Sept 14, 2023.

[ii] The success rate indicates what percentage of funds that started the sample period went on to survive and generate a return in excess of the equal-weighted average passive fund return over the period. To calculate survivorship, Morningstar divided the number of distinct funds (based on unique fund ID at the beginning of the period) that started and ended the period in question by the total number of funds that existed at the onset of the period in question (the beginning of the trailing one-, three-, five-, 10-, 15-, or 20-year period)



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Trademarks and copyrights of materials referenced herein are the property of their respective owners. Index returns reflect total return, assuming reinvestment of dividends and interest. The returns do not reflect the effect of taxes and/or fees that an investor would incur. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. An index is an unmanaged portfolio of specified securities and does not reflect any initial or ongoing expenses nor can it be invested in directly. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.


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