Morningstar Investment Management South Africa has released its first Active/Passive Barometer for the local market, offering investors an evidence-based view on how active funds have performed relative to their passive peers across a range of Morningstar categories.
The report provides key insights into where active managers are delivering value, and where lower-cost passive strategies remain difficult to beat.
Michael Dodd, senior fund analyst at Morningstar Investment Management SA, says the report is a valuable resource for investors seeking to understand the dynamics between active and passive fund performance across various categories.
“The Active/Passive Barometer is a useful tool that can help investors calibrate their odds of succeeding with active funds in the different areas based on recent trends and longer-term history,” he says.
Morningstar believes that both active strategies and passive strategies have a role to play in building well-diversified, cost-effective portfolios.
“Our research shows that low-cost investing is a sure-fire way to improve outcomes, but there are also times where it can be justified to pay for active management. This report aids us in understanding key trends that help inform investment selection and implementation when building client portfolios,” says Dodd.
According to Morningstar, the Active/Passive Barometer uses unique ways to measure active managers’ success:
- It evaluates active funds against a composite of actual passive funds – not versus a costless index. In this way, the benchmark reflects the actual, net-of-fee performance of the passive funds available to investors.
- It assesses active funds based on their beginning-of-period category classification; to better simulate the funds an investor would have chosen at the time.
- It considers how the average unit of currency invested in various types of active funds has fared versus the average unit of currency in passive funds.
Active funds’ success rate tends to fall over time
In line with findings from other regions’ barometers, it is not uncommon for South African active funds to outperform the passive funds’ average in the short term. However, success rates tend to be lower over the long term, particularly in equity categories, says Dodd.
The success rate indicates what percentage of funds that started the sample period went on to survive and generate a return in excess of the passive composite return over the period.
“One year is not a sufficient time horizon from which to draw conclusions, as success rates can fluctuate from year-to-year based on market conditions. Longer horizons, though, provide stronger signals that investors can incorporate into their decision-making process,” says Dodd.
“Globally, investors have increasingly converged toward low-cost investments, with a large-scale shift from active to passive strategies. However, South Africa has lagged this trend. Active investing still plays a far more prominent role locally, largely due to differences in market structure and development,” he says.
Good year for active SA equity managers
Active South African equity managers had a good 2024, where the active success rate was 83.6% in December 2024.
“Strong performance from the mid- and small-cap parts of the local market in 2024, relative to the large-cap FTSE/JSE Top 40, meant a greater breadth of opportunities for active managers to add value over the past year. Over the past decade, however, the success rate was a disappointing 25.5%,” says Dodd.
“In contrast, active Global equity managers struggled against the backdrop of a strong US equity market in 2024, led higher by a concentrated rally in the tech sector. This made it difficult for active managers to beat low-cost market-cap-weighted passive strategies.”
Active Global funds struggle
In the Global Large-Cap Blend Equity category, only 13.8% of active equity funds outperformed their passive competitors in 2024. “Over the long term, the case for passives in this area remains overwhelming. On a 10-year basis, only 3.9% of active funds in the Global Large-Cap Blend category beat the passive alternative,” says Dodd.
In the Global emerging-markets category, 33.9% of active managers beat their passive peers in 2024. This falls to 28.4% over five years and to 20.1% over 10 years.
Much like their developed counterparts, performance in the past few years has been largely driven by a small cohort of tech names, particularly Taiwan Semiconductor Manufacturing Company and Tencent. “Underexposure to these two names has proved a common source of underperformance for many active managers,” says Dodd.
Higher success rates for active bond managers
In a strong year for the South African bond market, active managers in the ZAR/NAD Diversified Bond category produced reasonable results. Although the asset-weighted performance of the active and passive composites was neck-and-neck at 17.1% for the year, the one-year success rate for active managers in the category was 55.2%. This rose to 59.5% over five years.
“Active managers in Global bond categories generally saw higher success rates in 2024 than they have in the past. Managers found an easy way to add value via the management of duration, although a drop in success rates in the second half of the year signals that some managers were unable to adapt to quickly changing bond market conditions,” says Dodd.
Credit remains an area where active bond managers have more latitude to add value over extended periods, evidenced by a one-year success rate of 65.9% for the Global Corporate Bond category and a 10-year success rate of 40%, he says.
Property: passive demonstrates value over the long term
Active South African property managers had a difficult 2024, with a one-year success rate of 33.3% in what was a strong year for the local sector.
“Over the long term, active managers have demonstrated their value over passive competitors in this category, with a 10-year success rate of 60.5%. This level of success compares favourably with the results of active managers in the Global property category, where the 10-year success rate of 20.8% is much lower,” says Dodd.
