Want active management? Choose wisely

While Australia’s active managers have been getting some negative publicity over the past two years, new Morningstar research reveals that, selectively used, the story is not all bad.

Morningstar’s latest Active/Passive Barometer reveals that despite a large variation in success rates, the top-quarter performers in every category have generated positive excess returns over the passive composite in a trailing 10-year period.

The ratings house identified the Australian mid/small-blend category as the “stellar avenue for active managers to demonstrate their value”

“The ability of active funds to play on pricing inefficiencies in relatively under- researched companies and the autonomy to proactively tweak their portfolios accordingly provide a tangible advantage over passive indexes,” it said.

But the pendulum analysis makes it clear that taking advantage of that active out-performance is also down to careful manager selection.

It said that in certain categories like Australia mid/small-blend favour active managers, while choosing passive managers would be a more prudent bet in the world large-blend category.

“Meanwhile, in a category like Australia large blend, it can be a 50/50 decision,” it said.

The Morningstar analysis said the cost of a bad decision is much higher in certain categories such as emerging markets but not as consequential in others like Australian real estate or global bonds.

While pointing to the positives around active management, Morningstar’s analysis said it was important to note that, in most cases, passive strategies have better survivorship rates than their active counterparts.

It said survivorship rates are a crucial data point to keep in mind when looking at the efficacy of active funds within a category in circumstances where even in categories that are favourable to active strategies, a low survivorship rate will adversely affect the chances of achieving one’s return objectives.