Morningstar - Q1 2022 - 42

Strategies
EXHIBIT 2
Greater Volatility As shown by the mid-blend and small-growth categories,
funds' dispersion of returns typically rises as their active share rises.
Active Share Versus Rolling 12-Month Excess Return, 2003 Through 2020
Mid-Cap Blend Morningstar Category
Excess Return
100%
50
-50
-100
0%
Active Share
Small-Growth Morningstar Category
Excess Return
150%
50
100
-50
-100
0%
Active Share
Source: Morningstar. Data as of 12/31/2020.
Note: Based on gross returns using oldest share class only.
20
40
60
80
100
20
40
60
80
100
categories. (The underperformance of funds
with high active share within mid-blend is also
statistically significant.)
The higher costs of high-active-share cohorts
dulled whatever performance edge they may
have had, raising doubts about the value they add.
From before fees to after, annualized excess
returns of the large-blend and -value categories
dropped to 0.39 and 0.13, respectively, and
became statistically insignificant advantages.
Within small growth, the superior gross returns of
funds with high active share became inferior
net returns relative to funds with low active share.
There remained a single category whose highly
active managers retained a meaningful edge
over their low-active-share peers once expenses
were settled: large growth.
As with any analysis applying simple averages,
the results can be skewed by outliers-
those funds in a cohort that perform extraordinarily
well or poorly. Success rates, which measure
the percentage of funds that both survive
and outperform during the measurement window,
don't suffer from this problem. They provide
an effective gauge of the probability of
selecting market-beating funds within each
active-share quintile.
two extremes, suggesting that investors should
expect to pay more for higher active share.
Where High Active Share Has an Edge
From January 2003 through December 2020,
funds with high active share failed to justify their
fee premium in most categories, as measured
by their performance over 12-month rolling
periods. (Over 36-month rolling periods, their
performance was worse.)
Stock-pickers deserve some credit: In five of the
nine categories (large value, mid-growth,
small blend, small growth, small value), the
42
Morningstar Q1 2022
highest before-fee excess returns came from the
most active funds, which on average exceeded
their category indexes between 0.35 and
1.93 annualized percentage points. On the other
hand, the high-active-share funds within
mid-blend and mid-growth posted their
respective categories' poorest (and negative)
excess returns. Mid-growth's sole cohort to show
before-fee outperformance was its lowest
active-share quintile.
The results implying an advantage for high
active share come with a caveat: They
were statistically significant only for the large-cap
The picture looks similar through this lens. Funds
with high active share demonstrated the best
chance of before-fee outperformance only within
the large-growth and large-blend categories.
But that didn't necessarily suggest that higher
active share systematically led to better chances
within those categories; large-blend funds
whose active share ranked between the 60th
80th
and
percentiles (Quintile 4) had their category's
poorest success rates. High-active-share funds had
the weakest success rates in all but one of
the small- and mid-cap categories, where active
share below their categories' 40th
had the strongest success rates.
percentiles
Funds with high active share extended their
lead within large-cap categories net of fees. The
relative success rates within the large-growth
and large-blend categories remained robust.
High-active-share large-value funds also showed
an advantage over peers. But there was little
Morningstar - Q1 2022

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