Sunniva
Kolostyak:
Welcome
to
Morningstar.
Should
you
invest
in
active
or
passive
funds?
Here
to
try
and
answer
that
question
today
is
Monika
Calay,
director
of
passive
strategies
research
at
Morningstar.
Monika,
always
a
pleasure
to
have
you
in
the
studio.
You
and
your
team
have
been
working
on
the
Active/Passive
Barometer
research.
What
does
it
tell
us
about
how
you
should
invest
in
active
or
passive
funds?
Monika
Calay:
Sure.
So,
when
we
look
at
the
research
over
the
past
decade,
what
we
see
is
that
active
managers
have
had
a
hard
time
keeping
up
with
passive
funds.
And
I
think
there’s
two
main
reasons
for
that.
The
first
is
costs.
Active
funds
are
more
expensive
than
their
passive
peers.
And
these
costs
compound
over
time,
and
they
can
really
eat
into
returns.
And
then
secondly,
it’s
data
availability.
Data
is
now
more
widely
available.
Information
spreads
quickly.
And
so,
it’s
harder
for
active
managers
to
find
those
hidden
spots,
those
hidden
gems
that
others
haven’t
seen
yet.
SK:
So
last
time
we
spoke
about
this,
we
discussed
global
equity
income
as
a
category
where
the
active
side
is
adding
value.
Is
that
still
the
case
in
this
report?
And
are
there
any
other
categories
within
equities
that
people
should
be
looking
at?
MC:
Sure.
So,
this
is
where
things
get
interesting.
Active
managers
have
historically
been
successful
in
the
global
equity
income
category,
and
that
still
remains
the
case.
I
think
the
main
reason
for
this
is
that
passive
funds
have
a
structural
bias
towards
small
caps
and
towards
value.
And
over
the
past
decade,
the
market
has
favoured
large
caps
and
growth.
And
so,
this
was
an
area
that
active
managers
could
exploit.
SK:
And
another
category
that
people
think
active
should
be
doing
well
in
is
emerging
markets.
Are
they
adding
any
value
there?
MC:
Well,
let’s
talk
about
emerging
markets.
Emerging
markets
is
an
interesting
one.
So
conventional
wisdom
states
that
active
managers
should
have
higher
success
rates
in
less
efficient
markets,
such
as
the
emerging
markets.
But
actually,
the
data
shows
a
different
story.
Over
both
short
and
long
periods,
active
managers’
success
rates
in
the
emerging
markets
have
been
lower
than
50%,
meaning
that
actually
passive
funds
outperform.
And
I
think
the
main
reason,
you
guessed
it,
it’s
costs.
Actually,
active
managers
are
pricey
in
this
category,
five-six
times
more
expensive
than
their
passive
counterparts.
So,
if
you
have
an
active
fund
that
is
charging,
say
1.2%,
it
would
need
to
basically
generate
at
least
1%
of
alpha
every
year
to
outperform
a
passive
fund
that
is
charging
0.2%.
And
so
that’s
a
pretty
high
bar
to
clear.
But
what’s
interesting
is
that
over
the
past
year,
we
have
seen
success
rates
increase
in
the
emerging
markets
category
for
active
managers.
And
this
is
because
they’ve
been
strategic
about
their
country
allocation.
So,
they’ve
been
cautious
on
China
and
bullish
on
Brazil
and
those
bets
have
played
well
into
their
favour.
SK:
So,
moving
on
from
equities
then,
what
about
fixed
income?
How
is
it
looking
there?
MC:
Sure.
So,
fixed
income
is
a
different
ballgame.
Active
managers
tend
to
fare
better
here.
The
bond
market
has
its
own
quirks
and
active
managers
can
exploit
things
like
adjusting
the
portfolio
to
interest
rate
sensitivity
or
finding
sweet
spots
in
the
credit
world.
And
especially
now
with
rates
fluctuating,
being
nimble
has
been
an
advantage
for
active
managers.
And
credit
selection
has
actually
been
a
real
strong
suit
for
active
managers,
especially
in
2023
when
we
look
at
the
investment
grade
category.
SK:
So,
this
report,
what
does
it
tell
us
as
investors
about
how
we
should
allocate
to
active
and
to
passive?
MC:
It’s
not
a
one
size
fits
all.
And
I
think
with
the
barometer,
it’s
a
fantastic
tool
for
asset
allocation.
And
we
hope
that
it
helps
our
clients
to
select
where
they
should
go
passive
and
where
maybe
it
is
worth
spending
a
little
bit
of
extra
time
doing
your
due
diligence
to
find
a
strong
active
fund.
SK:
Monika,
thank
you
very
much
for
being
in
the
studio
today.
For
Morningstar,
I’m
Sunniva
Kolostyak.
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