Why Active Management Is Beginning to Outshine Passive Funds

The debate between active and passive management has been going on for years. And while active management has faced headwinds over the past decade or so, it’s starting to reclaim dominance over passive.

Proponents for passive management contend that informationally efficient markets make it difficult for active funds to regularly beat the benchmarks. However, Moneta Group Investment Advisors notes that this dynamic has changed.

See more: “Active Investing Can Adapt If Recession Misses

For years, investors have lived in an economic environment in which interest rates have been nearly zero. But over the past year, interest rates have risen sharply. This gives active managers the chance to shine. Per Moneta, the Fed’s aggressive monetary tightening, combined with the pandemic, have “upended the foundation that passive management stood upon to buttress its leadership over the last decade.”

Better Odds of Outperforming the Benchmark

For the year ended June 30, most (89%) of Morningstar’s 18 active categories had a success rate of at least 50% versus the passive cohort. This means that, over the previous 12 months through June 2023, an investor would have had better odds of outperforming by selecting an active manager instead of a passive manager in each of the represented categories.

Moneta’s Mark Webster and Chris Kamykowski pointed out that this trend has been growing over the last few years. Plus, it’s also broadening across categories. Post-pandemic, the overall average success rate has risen to 48% from the 36% rate seen from 2012-2020.