Which Funds Make it to Their 10th Birthday?

A look at survivorship rates show active funds often struggle to make it to their tenth birthday, according to Morningstar research

Annalisa Esposito 3 September, 2020 | 12:05PM
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Fund Birthdays

Buy and Hold is an oft-recommended approach to investing, but how can you keep holding a fund if it gets wound up? All too often, funds have a shelf life of just a few short years. The latest Morningstar Active/Passive Barometer looks at the survivorship rate of funds across Europe, revealing the categories where funds are most likely to reach their tenth birthday. 

Fund Survivorship Rates

Morningstar's analysis found that actively managed UK-mid cap funds had the greatest lifespan - incredibly, 100% of funds in the group made it to their tenth anniversary.  The so-called “Survivorship Rate” of funds is the proportion of those which existed ten years ago and are still around today.

The survivorship rate for UK-mid cap funds has increased markedly since the latest Barometer a year ago, rising by 11 percentage points; that's despite the fact the UK has been widely out of favour among investors. 

survivorship rate

But the rate of active UK Mid-Cap funds is largely an exception. Survivorship rates for active funds across most of the other fund categories are far less impressive. This is particularly true for funds investing in Europe, the US and Japan. In most cases, fewer than half of the active funds which were available to investors a decade ago do no longer exist today. These funds may have been closed, repurposed or simply merged with another product.

The survivorship rates of active US and UK Large-Cap equity funds, for example, are 40.4% and 45.6% respectively. The rates for their passive counterparts are slightly higher at 62.8% and 50%. That gap is wider for Japan large-cap funds, where the survivorship rate is just 38.3% among active funds at 65.5% for passive options. 

Why Active Funds Don't Beat the Benchmark

Morningstar analyst Dimitar Boyadzhiev says the reulsts are unsurprising, as fund managers have struggled to often beat their passive counterparts in recent years. Fees are often the biggest hurdle that active funds have to overcome, with tracker funds often a fraction of the price.

Another headwind for some funds is that the market in which they invest is simply incredibly hard to beat. Indeed, the barometer shows that just 1.5% of US Large Cap equity active funds managed to beat their passive counterparts over a 10-year period, compared to 72.7% of UK Mid-Cap funds.

Elsewhere, the survivorship rates for active Global Emerging Markets and Global Large-Cap Value funds are 58.6% and 53.8% respectively. These categories have the greatest success rates after UK-mid cap funds. This may be because such categories are less well-researched by other investors and analysts, allowing managers to show their skill at finding hidden gems and beat their benchmark.

Funds that can outperform typically last longer, while those which fail to meet the mark are often mothballed. The disparity in survivorship serves as a reminder to investors of the importance of doing your homework before choosing where to use a tracker fund and where to employ the skills of a fund manager. 

“Comparing mortality rates between active and passive funds shows that the latter have had better odds of surviving over the long term,” says Boyadzhiev.

 

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Annalisa Esposito  is a data journalist for Morningstar.co.uk