‘Their Own Worst Enemies': Why Active Managers Struggle to Outperform, According to Morningstar

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Active managers are still failing to beat their benchmarks despite surging interest in stock picking, and there's a glaring reason why, says Morningstar's Ben Johnson.

"Over longer periods of time, most active funds simply fail to survive," Johnson, his firm's director of global exchange-traded fund research, told CNBC's "ETF Edge" on Monday.

"In most cases, they fail to deliver the goods. They fail to outperform their benchmarks. And that's in no small part because they have a very high hurdle and that hurdle is often times their fees."

Just 47% of active equity fund managers managed to outperform their passive peers in the one-year period that ended June 30, 2021, according to a recently released semiannual report from Morningstar.

The results get worse as time goes on. Only 25% of active equity fund managers and a meager 11% of those managing large-cap funds outperformed over a 10-year period, the report said.

That's in part because many funds are "their own worst enemies" when it comes to fees, overcharging for what they ultimately deliver to their end investors, Johnson said.

American Century, one of the few outperformers, relies on a combination of skilled managers and cost consciousness, its head of ETFs, Ed Rosenberg, said in the same interview.

It's how the firm's Avantis US Equity ETF (AVUS) and Avantis US Small Cap Value ETF (AVUV) are both beating the market year to date and over the past 12 months, he said.

"Fees are important and the fees you charge are really important for those products," he said. "For the products we have, the fees are pretty reasonable for the active management that you're getting, especially compared to other products or even mutual funds in the space."

American Century has three active management methods: a traditional fundamental strategy, "quantamental," which combines fundamentals with a quantitative approach, and a more systematic focus.

"By having your fees set appropriately and the manager doing his or her job, it gives you the opportunity to outperform over the long term," Rosenberg said.

AVUS and AVUV both hit all-time highs Wednesday.


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