Active funds struggle against passive funds in flush times because of Dunn's Law: "When an asset class does relatively well, an index fund in the asset class does even better. In contrast, when an asset class does poorly, the active managers do better in that asset class."
The maxim was coined by portfolio strategist Steven Dunn in the 1990s to explain why active funds lagged their benchmarks during the bull market.
Morningstar's analysis of active and passive funds supports Dunn's theory. For example, active value fund managers suffered in their short-term success rates against value index funds because value stocks have performed well over the past year.
Meanwhile, the long-term success rates of active managers against passive funds were higher for funds that invested in asset classes that have performed poorly over the past three years, such as those that invest in emerging market stocks.
Active funds also face tail winds when it comes to beating index funds because of higher fees. Last year, the asset-weighted average expense ratio for passive funds was 0.18 percent compared with 0.78 percent for active funds, according to Morningstar.
Investors have taken notice.
In 2011, passive funds gathered $140 billion more than active funds. Last year, passive funds took in $576 billion more than active funds. That's an impressive feat when you consider there are eight active funds for every passive fund.
Lower fees, as opposed to better performance, may be the big reason more investors are switching from active to passive. Morningstar found the investors in active funds improved their odds of beating passive funds by favoring funds with lower-than-average expense ratios.
"It's not so much about active versus passive as it is about fees," Morningstar's Johnson said.