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Passive Finally on Top

As expected, passive U.S. equity funds this past month officially surpassed active U.S. equity funds in assets under management. By the end of August, passive U.S. funds had total net assets of $4.27 trillion, compared with $4.25 trillion in active U.S. equity funds, according to data provided by Morningstar.

At the end of the day, performance has driven investors to choose passive funds over active. The performance deficit of active managers, which has been exacerbated by the prolonged bull market, is outlined in Morningstar’s latest release of its Active/Passive Barometer. This measures the percentage of actively managed mutual funds by asset class that outperform available passively managed index products in the same asset class over various periods of time. 

As the table above clearly shows, the odds that an active manager will beat the indexers is pretty low particularly in more efficient market categories. Only in mid- and small-cap growth funds, and only in the last five years, do the odds start to favor active. Costs are an important factor. Selecting a higher cost fund, even in small growth, significantly lowers the chance of outperformance.

These figures contain data from all funds that are classified as actively managed and does not consider active share. However, it is unlikely percentages above will shift in the near term to the degree necessary to convince investors to reconsider active.