Morningstar Introduces Active/Passive Barometer to Measure Relative Performance of Active Fund Managers against Passive Peers

CHICAGO, June 25, 2015 /PRNewswire/ -- Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today introduced an Active/Passive Barometer to help investors measure the relative performance of active U.S. fund managers against passive U.S. funds within their respective Morningstar categories. Morningstar's manager research analysts presented the new report at the 27^th annual Morningstar Investment Conference for financial advisors in Chicago. The report measures active fund managers' success using investable passive alternatives as the benchmark.

"The active versus passive debate is a familiar one in the industry. Our new barometer provides investors with an ongoing, practical test of how active managers have fared against passive alternatives," Ben Johnson, Morningstar's director of ETF research, said. "Our approach is squarely focused on the performance of actual investable options, instead of an index. We're also replicating the investor experience by studying funds based on their category classification at the beginning of the time period, controlling for survivorship, and taking into account the importance of fees."

To measure performance, Morningstar calculates success rates, which indicate the percentage of actively managed funds that survived and generated returns in excess of those produced by the average passive fund in the same time period in a particular category. The average passive fund return reflects the actual, net-of-fee performance of passive funds in each category. Morningstar also calculates the success rates for each fee quartile in every category.

Key findings from the Morningstar Active/Passive Barometer, as of year-end 2014 data, include:

• Actively managed funds underperformed their passive counterparts across nearly all asset classes and Morningstar categories examined in the report, especially in the 10-year period, and experienced higher mortality rates, where funds merged or closed. The U.S. mid-cap value category was the only one where actively managed funds had a 10-year success rate above 50 percent.
• Low-cost active funds were more likely to survive and outperform than higher-cost active funds over the long term, but low-cost active funds had lower average annualized returns compared with the average passive fund in nine of the 12 Morningstar categories examined in the report.
• Over the trailing three- and five-year periods, 72.9 percent and 69.7 percent of active intermediate-term bond funds, respectively, beat their average passive peer, which surpassed the performance of active U.S. equity funds. No U.S. equity category notched a success rate higher than 50 percent in the same time periods.
• Actively managed U.S. value funds had higher long-term success rates than U.S. blend and growth funds. Active large-cap value, mid-cap value, and small-cap value funds had success rates of 38.2 percent, 54.4 percent, and 48.4 percent, respectively, for the 10-year period.
• Low-cost active U.S. mid-cap value funds had the highest success rate, at 68.2 percent for the 10-year period, while high-cost active mid-cap blend funds had the lowest success rate, at nearly 5 percent.
• Over the past 10 years, 40.2 percent of actively managed foreign large blend funds survived and beat the average passive fund, nearly double the success rate of active U.S. large-cap blend funds.
• Investors tend to select better-performing funds, as category asset-weighted returns were generally higher than the equal-weighted returns. For example, active U.S. large blend funds showed asset-weighted performance of 6.74 percent versus 6.42 percent equal-weighted performance over the trailing 10-year period.

The report is available at http://global.morningstar.com/activepassiveJune2015. Morningstar plans to update the Active/Passive Barometer twice a year and publish its reports in Morningstar Direct^SM, the company's web-based global investment analysis platform for institutional investors; and Morningstar Office^SM and Morningstar® Advisor Workstation^SM, the company's portfolio analysis and investment research platforms for financial advisors.

Morningstar provides data on approximately 186,500 open-end mutual funds and 11,300 exchange-traded product listings as of March 31, 2015.

About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar provides data on approximately 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 15 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had more than $179 billion in assets under advisement and management as of March 31, 2015. The company has operations in 27 countries.

©2015 Morningstar, Inc.  All rights reserved.

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SOURCE Morningstar, Inc.

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