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Nearly half of stock pickers beat their passive peers over the last year

Key Points
  • 48% of active U.S. stock funds survived and outperformed their passive peers over the 12 months through June, up from 37% year-over-year, according to Morningstar.
  • Active growth funds are having the biggest rebound in performance as 66% of them trounced their passive counterparts.
  • However, about half of the most expensive active funds did not survive.
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48% of active US stock funds beat passive through June 2019: Picker

Stock pickers may be on the comeback trail.

Forty-eight percent of active U.S. stock funds outperformed their passive peers over the 12 months through June, up from 37% year-over-year, according to Morningstar, which analyzed more than 4,000 funds with $12.5 trillion in assets.

Within equity funds, active growth funds are having the biggest rebound in performance as 66% of them trounced their passive counterparts, an increase from 44% last year, Morningstar data show. Mid and small-cap growth funds particularly stood out this year.

"These funds' larger average market caps relative to many of their indexed peers helped them during a span that was marked by a rout in small caps," Ben Johnson, Morningstar's director of global ETF Research, said in a note.

However, about half of the most expensive active funds did not survive as investors continue to gravitate towards low-cost passive products such as exchange-traded funds and index funds, according to Morningstar.

"Active management doesn't have a skill problem; in most cases it's a fee problem," said Steve Deschenes, research and development director of Capital Group. "The value that it provides in that gross of fees excess performance is in many cases more than taken away by how much active management charges."

Deschenes said active funds with low fees and high manager ownership generally provide better performance.

The cheapest active funds outperformed more than twice as often as the priciest ones in the past year, and two thirds of the cheapest funds survived, Morningstar said.

Low-cost passive vehicles have now taken over nearly half of the stock market as more investors shun stock pickers and flock to index funds, according to Bank of America Merrill Lynch. Equity passive funds alone have ballooned to a more than $3 trillion market in less than 10 years, according to Morningstar.

Notable investors including the hero of "The Big Short" Michael Burry cautioned against the proliferation of passive investing. Burry recently said passive investments are inflating stock and bond prices in a similar way that collateralized debt obligations did for subprime mortgages more than 10 years ago, calling the industry a bubble.