Here are the details: Over the past three years, while nearly half of actively managed funds beat their benchmark index, only 37% beat the benchmark on a risk, size, and style basis. The results are similar when covering five and ten year returns.
Explanation: Managers take on greater risks with the purchases they make. Some risk comes in the form of buying stocks that are speculative or holding concentrated positions in a stock. When a manager takes on those risks the investor should receive a greater return. This is how bonds work where lower rated bonds with a higher risk of default pay a higher interest rate than high grade bonds with low risk of default. The study showed that investors are not receiving a higher return for the added risks on their money.
Another part of the Morningstar study emphasizes the benefit of using passively managed index funds. In absolute returns, over the past five years only two out of nine Morningstar style boxes had more than 50% of active managers beat their indexes.
