Morningstar - Q4 2020 - 9

EXHIBIT 1

Active Funds' Success Rate by Category (%)
Category

10-Year
10-Year
(Lowest Cost)* (Highest Cost)

Year-to-Date

1-Year

3-Year

5-Year

10-Year

15-Year

20-Year

U.S. Large Blend

34.9

36.1

24.7

13.7

9.5

14.0

13.9

14.6

6.3

U.S. Large Value

49.1

42.1

26.1

18.2

11.5

10.8

16.5

25.8

6.1

U.S. Large Growth

47.8

38.9

33.3

23.9

10.1

9.9

-

18.7

3.4

U.S. Mid Blend

36.4

34.7

27.9

15.0

15.7

8.0

15.7

37.0

3.7

U.S. Mid Value

73.9

72.7

46.9

32.5

23.2

43.3

-

28.0

17.4

U.S. Mid Growth

65.6

63.2

62.4

55.8

39.9

33.9

-

46.8

29.8

U.S. Small Blend

30.2

25.6

23.5

20.4

15.5

8.9

34.3

29.7

8.3

U.S. Small Value

53.0

40.0

26.4

26.3

32.7

31.8

-

38.1

19.0

U.S. Small Growth

63.8

58.0

53.6

51.4

43.6

27.4

-

50.0

34.1

Foreign Large Blend

51.5

50.8

28.7

21.2

20.4

14.3

15.8

46.2

18.4

Foreign Large Value

68.0

66.3

28.3

26.6

31.6

-

-

35.0

30.0

Foreign Small-Mid Blend

28.1

21.9

9.4

7.1

22.2

-

-

25.0

0.0

World Large Stock

59.7

50.4

39.1

29.3

26.3

29.8

-

35.7

19.0

Diversified Emerging Markets

65.6

65.7

45.6

48.9

44.7

35.4

-

54.2

21.7

Europe Stock

72.2

68.4

46.2

42.9

35.3

31.4

-

42.9

0.0

U.S. Real Estate

80.3

76.0

75.3

66.7

40.2

30.5

23.1

47.1

23.5

Global Real Estate

83.1

76.3

59.4

47.5

53.2

-

-

60.0

40.0

Intermediate Core Bond

39.8

48.3

31.3

28.2

22.9

14.5

8.9

41.7

8.3

Corporate Bond

30.2

36.1

14.0

43.6

40.0

-

-

42.9

14.3

High-Yield Bond

42.4

47.9

43.7

44.4

44.5

-

62.9

42.9

-

*Green/red shading indicates that active funds in this fee quintile had above/below average success rates.
Source: Morningstar. Data and calculations as of 6/30/20.

to be greater than the probability and reward
for finding a winner. The inverse tends to
be true of the fixed-income and foreign-stock
categories examined, where long-term success
rates have generally been higher and excess
returns among surviving active managers skewed
positive over the past decade.
Most Investors Choose Above-Average Funds
All averages have their flaws. And it is a flawed
assumption that investors pick average funds.

Indeed, the data shows that the average dollar
invested in active funds (asset-weighted
average return) outperformed the average active

fund (equal-weighted average return) in all
but four categories over the past 10 years. This
implies that investors favored cheaper, higherquality funds. However, the average dollar
in active funds does not always do better than
the average dollar invested in passive ones.
Looking at the difference between asset-weighted
returns for active and passive funds can
give investors a sense of where they've been best
served by active managers.
In general, investors fared better with index
funds than active ones in U.S. stock categories and
with active funds in fixed-income and foreign
stock categories.

Costs Matter
The biggest lesson in this data set is that fees
matter. The cheapest funds succeeded about twice
as often as the priciest ones (34% success rate
versus 16% success rate) over the 10-year
period. This not only reflects cost advantages but
also differences in survival, as 65% of the
cheapest funds survived, whereas 49% of the most
expensive did so. If there's one near-certainty in
investing, it is "you get what you don't pay for," as
Vanguard's late founder Jack Bogle said. K
Ben Johnson, CFA, is director of global exchange-traded
fund research with Morningstar. He is a member of the
editorial board of Morningstar magazine.

morningstar.com/lp/magazine

9


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Morningstar - Q4 2020

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