Asset AllocationOctober 15, 2024

Active Bond Funds Outpaced Passive Peers Over Past Year, per Morningstar

Actively managed real estate funds were also among the top outperformers for the 12 months that ended June 30.

Reported by Michael Katz

Approximately two-thirds of active bond funds beat their average passive category peers during the 12-month period ending June 30, leading all category groups in Morningstar’s most recent Active/Passive Barometer report.

The semiannual report, which measures the performance of active and passive funds in their respective Morningstar categories, covers more than 8,000 separate funds with a total of approximately $21 trillion in assets as of the end of the first half of 2024.

In particular, intermediate core bond funds were the top performers among active bond funds, outperforming their passive counterparts 72% of the time during the period. The funds, which typically carry more credit risk and have shorter durations than indexed offerings, benefitted from narrowing credit spreads and persistent inflation that kept interest-rate cuts at bay, according to the report. However, the category did not perform as well over the long term, as intermediate core bond funds outperformed their passive peers over the last 10 and 15 years only 45.5% and 15.9% of the time, respectively.

Actively managed real estate funds outperformed their passive peers 66% of the time during the 12-month period, with U.S. real estate funds and global real estate funds outperforming their peers 68.8% and 62.2% of the time, respectively. However, over the past 10 years, active global real estate funds outperformed their passive peers 54.5% of the time, compared with 50% of the time for U.S. real estate funds. The report noted that active success rates in the global real estate category fluctuate dramatically over short time horizons due to the diversity of funds it includes.

“Disparate returns between domestic and foreign real estate securities can whipsaw active managers’ relative results,” according to the report. “That explains how in 2023, active global real estate funds boosted their winning percentage to 71% from 20% in the year prior.”

Meanwhile, actively managed mutual funds or exchange-traded funds edged out their passive peers over the 12-month period, with 51% topping the average passive fund in their Morningstar category, up from 47% one year earlier. Morningstar’s report stated that “it was basically a coin flip whether an actively managed mutual fund or exchange-traded fund outperformed its average passive peer from July 2023 through June 2024.”

Active global or foreign-stock portfolios beat their typical passive peer about 43% of the time during the period, down from 57% from the same period a year earlier.

“Global- and foreign-stock categories have been kinder to active managers than U.S. markets,” the report stated. “Roughly three out of 10 active foreign-stock managers succeeded over the past 15 years, while just two out of 10 in the U.S. could say the same.”