Investors seeking to navigate the dynamic world of finance should take heed of the latest findings from Morningstar's 2024 US Active/Passive Barometer, which outlines the performance of actively managed funds compared to their passive counterparts. Published on March 12, 2025, this report highlights the increasing challenges faced by active fund managers and offers key insights for those considering where to allocate their investment dollars.
The stark realities of the report indicate a worrying trend for actively managed funds, as less than half, precisely 42 percent, managed to outperform identical index funds last year. This trend continues over a longer timeline, with fewer than one-fourth of active managers achieving superior returns over the past decade. Morningstar’s analysis, which encompasses nearly 9,300 unique funds representing around 68 percent of the US fund market, paints a comprehensive picture of the investment efficiency of these two management styles.
Specifically, the report reveals troubling statistics for large-cap equity funds. Only 7 percent of these funds not only survived but also managed to beat their passive rivals from the decade ending December 2024. This dismal figure echoes the broader findings of the S&P Dow Jones Indices’ scorecard, which reported two-thirds (65 percent) of large-cap US equity funds underperformed the S&P 500, matching historical trends where success rates tended to drop as investment horizons lengthen.
“The US large-cap equity market has been a difficult place for active funds to succeed in the long run,” the Morningstar report states, signifying the persistent struggle faced by active managers to deliver value.
Despite these challenges, the report does highlight areas where active management outperformed. Bonds emerged as a particularly bright spot, with 63 percent of active bond funds surpassing their passive peers—an impressive jump from 48 percent the previous year. Notably, 79 percent of active managers specializing in intermediate core bonds excelled, showcasing their capability to navigate credit risks effectively.
Real estate also shone brightly for active managers, as evidenced by 66 percent of US and global real estate funds outpacing their passive counterparts, up 6 percentage points from the previous year. Over the last decade, 47 percent of active real estate funds managed to outperform passive strategies, highlighting this asset class as one of the more resilient categories for active managers.
Small-cap funds, another category under the active management umbrella, also demonstrated comparative strength with 43 percent outperforming their passive competitors—a significant leap relative to larger peers.
Yet, not all data was rosy. Among large-cap equity categories, only 37 percent of active fund managers could outperform their passive counterparts last year, with this success rate shrinking even more to just 5.7 percent over the previous ten years among large-blend funds. This trend of diminishing returns renders the choices for investors even more precarious.
Diving more deeply, the challenges faced by active large-growth funds are particularly notable. The report revealed appalling survival statistics—only 1 percent of large-growth funds existing two decades ago both survived and outperformed their passive rivals. This statistic underlines the difficulty of picking investment winners within this category, as Morningstar notes the median ten-year excess return for surviving funds was negative across all three US large-cap categories.
Mid-cap funds did not escape the scrutiny either, with active mid-cap managers witnessing a startling decline of 8 percentage points from the year prior. The performance of active mid-cap value funds, in fact, slumped 35 percentage points from 2023 to 2024, indicating systemic issues within this segment of active fund management.
Another significant finding echoes throughout the report: fund fees continue to play a substantial role as predictors of performance longevity. The research indicated 28 percent of the cheapest active funds outperformed their passive peers over ten years, compared to only 17 percent of the highest-cost funds. Similarly, among the priciest large-cap funds, just 1.3 percent managed to outperform their passive benchmarks over the past decade. Meanwhile, 13 percent of the cheapest large-cap funds accomplished this feat, reiteratively stressing the importance of cost-effective investment strategies.
International equities have not carried the same fortune, with foreign stock funds’ collective success rate plummeting by 14 percentage points to just 40 percent. Strikingly, within the usually used markets like the BRICS, active funds faced extreme difficulties, with only 22 percent managing success—this marks a 36 percentage point decline since 2023.
Nevertheless, some European-focused active funds have managed to break the mold with success rates climbing to 47 percent, showcasing one of the largest improvements recorded across categories during the year—up dramatically from just 12 percent previously.
Interestingly, historical data shows foreign-stock funds have performed slightly above their US counterparts over time; only 15 percent of US active equity funds could outperform over the past decade, contrasting with the more favorable 27 percent rate seen for foreign-stock funds.
The findings outlined by Morningstar serve as both cautionary tales and guiding principles for investors exploring active versus passive fund management strategies. Important forthcoming updates from the Investments and Wealth Institute, focusing on investor psychology and family dynamics, are expected later this year and may provide additional insights to help investors make informed decisions.
The volatility synonymous with recent market conditions may not currently impact Wall Street jobs; certain sectors still show heightened demand, illuminating the complex interplay between investment strategies and labor markets.
Investors should heed the examples set by successful funds and remain vigilant about their instincts concerning fees versus performance. Understanding the outcomes from Morningstar’s report on the shortcomings of active management can help to instill cautious optimism moving forward.