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Morningstar’s Rekenthaler Finds Active Funds Passé

Morningstar’s John Rekenthaler pondered the question “[d]o active funds have a future?” and came to the conclusion “apparently not much.” Looking to the last twelve month net sales, Rekenthaler tallied the split at 68% passive (including ETFs) and 32% active.

Rekenthaler dissected three areas where active funds maintain a greater market share: target-date, international, and alternative funds. However, in each instance, he came to the conclusion that the advantage of active funds is fading. With target-date funds, Rekenthaler noted Vanguard’s continuing gain in market share, and further that target-date fund managers are adding passive investment options. While the performance of active international funds remain ahead of passive counterparts in most cases, Rekenthaler cited two examples where passive funds rank in the top 20%. Lastly, for alternative funds, Rekenthaler argued that generally lackluster performance may undercut continued investment in the area.

In sum, Rekenthaler concludes, “[a]ctive managers have become the periphery.”