Johanna
Englundh: Welcome
to
Morningstar.
Passive
funds
keep
attracting
assets
from
all
over
the
world
and
their
share
of
the
global
market
reached
38%
at
the
end
of
2022.
And
if
you’re
a
loyal
Morningstar
reader,
you
have
probably
seen
that
we
evaluate
the
performance
of
fund
managers
on
a
regular
basis
in
which
active
managers
time
and
again
fail
to
impress
as
a
group.
So
does
this
mean
that
we
should
all
pile
our
cash
into
passive
funds?
Maybe
not.
Jose
Garcia
Sarate,
your
Associate
Director
for
Passive
Strategies
Research
here
at
Morningstar.
What
do
you
think
about
this
assumption
that
if
active
managers
as
a
group
keep
failing
to
beat
their
passive
peers,
and
especially
over
the
long
run,
investors
might
aswell
stick
to
only
passive
index
funds?
Jose
Garcia-Zarate: Well,
there
are
several
reasons.
Explaining
the
increasing
popularity
of
passive
funds
andlow
management
fees
is
probably
the
most
important.
To
a
large
extent,
the
success
of
passive
investing
is
predicated
on
the
failure
of
active
managers
to
deliver
on
their
promises.
So
from
that
perspective,
it’s
understandable
that
many
investors
would
see
passive
funds
as
the
default
investment
option.
Now
the
question
is,
does
that
mean
that
we
should
give
up
even
trying
to
find
a
successful
active
manager?
And
I
think
the
answer
is
no.
There’s
always
room
in
every
asset
class
to
add
value.
It
may
be
challenging
to
find
those
investors,
but
that’s
a
reality.
Okay,
so
let’s
say
that
this
interest
keep
evolving
and
more
money
keeps
flowing
into
passive
funds
and
then
we
end
up
with
a
market
only
consistent
of
passive
index
fund.
What
could
that
lead
to?
Well,
I
mean,
my
first
thought
it
would
be
terribly
boring,
but
that’s
kind
of
like
a
jokey
statement.
The
more
serious
aspect
to
it
is
it
could
lead
to
severe
inefficiencies.
And
I’m
just
thinking
interms
of
the
market
construction.
I
mean
there
is
this
misconception
that
passive
funds
track
indexes
and
that
indexes
are
static
creatures
that
never
change.
But
that’s
not
true.
Indexes
can
vary
composition
and
do
actually
very
compositionon
the
back
of
the
decisions
that
we
as
individuals
take
on
certain
companies
or
in
certain
countries.
So
in
a
way,
a
passive
fund
cannot
really
work
without
the
activity
of
individual
investors.
You
would
be
negating
the
nature
and
basically
impairing
the
mechanism
of
indexing.
JE: Ok,
so
have
you
noticed
then
during
your
years
of
researching
the
market,
have
you
noticed
any
specific
areas
or
markets
where
active
managers
are
more
successful
than
in
others?
JGZ:
As
you
alluded
to,
I
mean,
we
run
a
study
called
the
Active
Passive
Barometer
where
we
measure
those
success
rates
of
active
managers
versus
their
passive
peers
in
the
group
of
Morningstar
categories.
These
success
rates
vary
for
different
reasons,
but
there
are
some
key
guiding
principles.
So
for
example,
highly
liquid
and
efficient
markets,
the
room
for
active
managers
to
add
value
is
going
to
be
lower.
Think
for
example,
the
US
large
cap
equity.
By
contrast,
active
managers
may
have
more
room
or
latitude
to
find
opportunities
in
markets
where
there
are
liquidity
constraints,
where
information
can
be
a
challenge
to
obtain,
or
even
markets
where
liquidity
is
not
such
a
big
problem,
but
there
may
be
dominated
by
a
specific
group
of
companies
or
a
specific
economic
sector.
JE: Do
you
have
any
thoughts
on
what
active
managers
could
do
to
compete
with
this
increasing
interest
in
index
funds?
JGZ: Well,
keeping
a
tight
reign
on
cost
would
be
a
good
way
to
start
with,
not
over
promising
could
be
another.
A
successful
active
manner
is
probably
one
that
is
acutely
aware
that
they
can
fail
and
there
will
be
periods
of
short
term
underperformance,
and
this
needs
to
be
properly
explained
to
investors.
JE: And
for
me,
then,
as
an
investor,
what
can
I
do
to
make
sure
that
I
choose
the
right
active
manager?
JGZ: Well,
that’s
the
key
challenge.
It’s
a
difficult
one.
So
I’d
say
that
thorough
duediligence
and
education
are
paramount.
But
I
do
understand
that
not
everybody
has
the
ability
or
the
resources
to
undertake
thorough
due
diligence,
for
example.
And
this
is
where
companies
like
Morningstar
comes
in
very
handy.
I
mean,
we
have
a
dedicated
team
of
very
experienced
analysts
whose
core
mission
is
to
identify
those
managers
tha
tcan
help
you
in
your
long
term
investing
journey.
JE: Very
interesting.
Thank
you
so
much,
Jose,
for
joining
us
here
today.
And
until
next
time,
I’m
Johanna
Englundh
for
morningstar.
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