Michael Dodd, Senior Fund Analyst at Morningstar Investment Management SA

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 that 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 and passive strategies have a role to play in building well-diversified, cost-effective investor 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.

Key findings from the 2024 report include:

• Short-term wins, long-term challenges: In 2024, active South African equity funds registered a success rate of 83.6% against a comparable passive fund composite. 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 in the last year. However, success over longer time horizons was much harder to achieve: over the past decade this success rate falls to 25.5%.

• Global equity struggles: Globally, active equity funds continued to face headwinds. In the Global Large-Cap Blend Equity category only 13.8% of active funds outperformed in 2024, and just 3.9% did so over the last 10 years.  In the global emerging markets category, while outcomes were slightly better, 20.1% of active funds beat passive rivals over the decade.

• Bright spots in local bonds and property: Some areas continue to show promise for active management. Active South African diversified bond funds saw a one-year success rate of 55.2%, rising to 59.5% over five years. In the South African property category, 60.5% of active funds outperformed passive peers over ten years – although 2024 was a more difficult year for the category, with just one-third of active funds outperforming.

In line with findings from other Morningstar regions’ barometers, short-term outperformance is not uncommon in South African active funds, particularly in equity categories, though success rates do tend to be lower over the long term. “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.

The value of this type of research is that it provides an evidenced-based approach for considering how to allocate global capital. The debate has long shifted from active versus passive to how best to use diversified strategies to help clients meet their investment goals. “The launch of Morningstar Global Funds in September was an important development that provides clients access to a wide investable universe constructed using both actively managed funds as well as regional and sector ETFs. Our aim is to build holistic portfolios for clients and use research like this to inform decision-making,” says Dodd.

The full Morningstar South African Active/Passive Barometer is available for download here.

ENDS