Actively managed mutual funds and exchange-traded funds made up some ground over the 12 months through June 2026 but still lagged their average passive peer. Just over 40% survived and beat their asset-weighted average passive composite, an increase of 7 percentage points from a year earlier.
We further analyze these findings in the midyear 2026 installment of the Morningstar Active/Passive Barometer, a semiannual report that measures the performance of active funds against passive peers in their respective Morningstar Categories. The US Active/Passive Barometer spans nearly 9,226 unique funds that accounted for approximately USD 29 trillion in assets, or about 67% of the US fund market, as of the end of June 2026. The full report can be found here.
Most Active Managers Continue to Lag Their Average Passive Peer
Although one-year success rates for active managers rose substantially in the 12 months leading up to June 2026, results varied widely across asset classes and categories.
Active managers did especially well across real estate, fixed-income, and US small- and mid-cap funds, but they didn’t fare as well in US large and foreign stock categories. Despite their disappointing performance, the overall US equity success rate rose 5 percentage points to 36%. The improvement was driven by active managers in the small- and mid-cap value categories, who surpassed a one-year success rate of 50%.
Success rates among active bond funds have started to come back, rising 22 percentage points after an abysmal 2025. Broad tariffs announced on April 2, 2025, distorted active bond managers’ risk expectations, leading to portfolio decisions that ultimately detracted from their performance. Passive bond funds, constrained by their benchmark mandates, benefited from staying the course as market conditions ultimately rewarded their limited discretion. Each fixed-income category in this report saw its one-year success rate increase by 16.7 percentage points or more over the 12 months through June 2026.
Looking at one-year success rates can be misleading given that market conditions can change year to year and favor some managers or categories while harming others.
Examining success rates across both short- and long-term horizons reveals a clearer pattern. Across all categories, an investor selecting an active manager at random would face a 60% probability of them underperforming their average passive peer.
However, keeping fees low can improve the odds of choosing a successful manager. Across 16 of the 20 categories, the choice of an active manager in the lowest fee quintile improved the chances of randomly selecting an active fund that outperforms. For some categories, including US large blend and mid-cap value, the success rates of the cheapest funds are more than double those of their most expensive active peers. In other categories, like diversified emerging markets, US real estate, and intermediate core bond, selecting a low-cost active fund raises the odds of success past 50%, making it more likely to choose a winner than a loser.
When Is Active Management Worth It?
The distribution of excess returns sheds more light on what’s going on inside each category than success rates alone. Looking at active funds’ 10-year excess returns helps answer a key question: If an investor were to select an active fund at random within a given category, how large is the benefit of choosing a winner versus the cost of ending up with a loser?
Given the rise of semiconductor and artificial intelligence stocks, US large-growth funds have been a popular choice for many investors. But the 10-year success rate of active managers in this category was just 5%, and the distribution of excess returns in the chart below skews heavily toward the negative side of the distribution. In other words, if an investor were to overcome the odds and successfully pick an active manager in the large-growth category, their reward for doing so would not be that big. Meanwhile, the potential downside from picking a poor performer was enormous. That’s not exactly an even trade-off.
In categories with strong 10-year success rates, like fixed income and real estate, the distribution of excess returns was skewed the other way, which strengthens the case for active management in these categories.
Global real estate is a notable category, where excess returns exhibit a positive skew. An investor choosing an active fund at random stands a much better chance of picking a successful active manager and earning a higher return for doing so.
Do Investors Make Good Decisions?
Investors can use success rates and excess return distributions to make more informed decisions, but those decisions still need to produce better long-term total returns. Are they selecting the best actively managed funds within their categories?
The chart below looks at equal-weighted and asset-weighted 10-year returns across categories. The asset-weighted return for active managers beat the equal-weighted return in 16 of the 20 categories, indicating that when investors chose an actively managed fund, they tended to put their money into the better performers. Ironically, two of the four categories where investors chose poorly were the most favorable for active investing. Both the global real estate and corporate bond categories recorded 10-year success rates above 44%. Admittedly, they are also two of the categories with the lowest returns across both active and passive funds.
Leave a comment