Active funds are failing to stand the test of time as persistent poor performance is forcing many to close or merge before they reach their tenth birthday.
The latest Morningstar Active vs Passive Barometer shows the so-called “Survivorship Rate” of funds over the past 10 years – that is the proportion of those which existed a decade ago and are still around today. Among many of the fund categories, the figures are starkly disappointing even for developed markets such as Europe, US and Japan. In most cases, less than half of the active funds available to investors 10 years ago no longer exist.
Just 43.8% and 48.5% of respectively US and UK Large-Cap equity funds have survived 10 years, and a meagre 36.7% of Japan large-cap equity funds. Among passive funds, the results are slightly more encouraging – for example, the survival rate for passive US and Japanese large-cap equity funds is 55.4% and 58.3% respectively.
Such low survival rates could be directly related to performance – the Barometer also reveals that just 1.5% of US Large Cap equity active funds managed to beat their passive counterparts over a 10-year period. [Link here] Many of these funds could have been rolled up as a result of poor performance.
Morningstar analyst Dimitar Boyadzhiev says: “There is a strong correlation between active managers’ survivorship rates and their success rates [how often they are able to beat their passive counterparts] meaning that more funds close due to sub-par performance.”
He adds that downward pressure on fees may also have caused a number of funds to close in recent years. Passive funds have helped drive the trend here too, as low-cost trackers have attracted investors who prefer to follow the market rather than pay active manager to try and beat it.
Boyadzhiev adds: “The proportion of active funds being closed is much high in categories with low success rates (i.e. those which underperform the market). For example, in the US, the survival rate of active managers is less than 40%, meaning more than half the funds that existed 10 years ago are now gone.”
UK Mid-Cap Funds Survive and Outperform
Meanwhile, 78% of UK Mid Cap Equity active funds were able to beat their passive counterparts over 10 years. Almost 89% of these funds have survived that same 10-year period – although it is worth pointing out that this is a very small group of just five funds.
While investors may think this is just survival of the fittest, and that only the best funds have survived, total fund numbers suggest this is not the case.
According to research by Morningstar, in 2008 there were 2,500 UK-domiciled funds available to investors. By 2018 some 60% of these funds had closed – with 200 disappearing in 2009 alone. However, over the same 10-year period, a further 2,000 new funds were launched, and 2010 was the second biggest calendar year for fund launches. This actually means there were a net addition of 400 new funds even despite so many closures.
Jon Miller, head of manager research at Morningstar, says: “It’s a good thing when attrition weeds out underperforming and expensive funds, but there’s still more to be done. Being consistently in the bottom echelons of a sector can put the spotlight on fund groups and this sort of pressures help explain why some throw in the towel.”
