Morningstar’s grim active manager analysis

Traditional active management has almost become a zero-sum game, with firms growing by taking market share from their peers, according to research and ratings house, Morningstar.

In a new analysis of asset managers listed on the Australian Securities Exchange (ASX), Morningstar’s Shaun Ler pointed out that average 12-month net flows for firms covered in the analysis were negative 5.7% of managed funds in the June quarter, representing a third consecutive quarter of decline.

“This is below the 4.7% and 4.5% growth recorded in the Australian and global markets, respectively, over the same period—suggesting market share losses at the cohort level,” he wrote.

The bottom line of the analysis is that traditional active managers need to deliver outstanding performance to win new money and, in the absence of doing so, are facing a shakeout with average or underperforming firms at risk of losing funds under management (FUM) or facing closure.

“The rise of passive investments, whose basic value proposition is index tracking at a low cost, has made active managers who fail to outperform their benchmarks increasingly obsolete,” it said. “To attract and retain flows, active managers must consistently deliver above-average returns, which is very difficult in practice.”

The Morningstar analysis says that, as a group, the fund managers within the analysis lack “the consistent outperformance needed to recapture market share lost to ETFs and industry funds”.

“Most deliver average peer-relative returns. Even GQG— despite its stronger long-term track record—faces near-term challenges, demonstrating the difficulty of consistently outperforming,” it said.

“Barring lasting, significant performance improvements, firms will be forced to pursue more defensive measures such as realigning compensation or forging external partnerships to defend market share and earnings.”

The analysis said that, on average, the firms within the analysis are likely to see a gradual decline in earnings over the long term.

“The post-April 2025 equity market recovery was much stronger than we expected, leading to resilient flows and strong investment returns, resulting in higher funds under management that should support near-term earnings.

“But over time, as rate cuts are priced in, volatility rises from prior lows and competition plays out—we expect net flows to slow, with fee compression and higher investments in distribution constraining long-term earnings growth,” it said.

Against this backdrop, it said active managers would need to keep their fees competitive, predicting continued fee compression through to fiscal 2030.

“Some firms, like Pinnacle, have managed to withstand fee pressure by shifting their focus to higher-margin asset classes. Others, such as L1 Group and Magellan, have higher blended group margins, given their relatively lower proportions of lower-margin institutional mandates. However, we believe the broader trend on fees is downward, as competition from passive funds continues to exert fee pressure, capping earnings growth.”