Key Takeaways
- • Morningstar's newly introduced active/passive sub-classifications show that cost tracks outcomes: as of Sept. 30, 2026, the average index-tracking, non-strategic-beta US equity fund charged about 0.05% asset-weighted, roughly one-twelfth the 0.59% average of active-discretionary funds.
- • Over trailing one-, three-, five- and 10-year periods to Sept. 30, 2026, cheaper fund groupings, led by active-systematic funds, beat their style-specific indexes more often than active-discretionary funds, with index-tracking non-strategic-beta funds succeeding most often.
- • Over the 10 years ended Sept. 30, 2026, active-discretionary funds showed the highest tracking error and slightly higher volatility and drawdowns than cap-weighted index trackers, per Morningstar's analysis.
- • Morningstar's author concludes that cost remains the primary determinant of success, and that active-systematic and strategic beta funds may suit investors seeking a middle ground between pure indexing and discretionary active management.
- • The analysis is limited to trailing periods, excludes dead funds (which biases active results upward), and the new data points are initially available only in Morningstar Direct.
Summary
Morningstar Australia has introduced five new data points that divide active and passive funds into finer categories: Active-Discretionary, Active-Systematic, Active-Other, Passive-Index Tracking and Passive-Other. Previously, all actively managed funds carried a single "active" label regardless of whether they were driven by portfolio manager judgment or quantitative rules. The new classifications are initially available in Morningstar Direct, the firm's institutional research product, rather than on Morningstar.com.au.
On costs, the analysis finds a spectrum rather than a clean divide. Active-systematic funds were on average cheaper than active-discretionary funds, and the gap widened when weighted by net assets. Among passive funds, index-tracking funds that were not classified as strategic beta were generally cheaper than strategic beta funds, largely because the biggest and cheapest value and growth index funds, such as Vanguard Value Index and iShares Russell 1000 Growth, are classified as strategic beta. Across all US equity funds, the asset-weighted average expense ratio for non-strategic-beta index trackers was 0.05%, compared with 0.59% for active-discretionary funds.
Success rates and excess returns follow the same pattern. Measured against style-specific indexes as of Sept. 30, 2026, cheaper groupings were more likely to outperform over most trailing one-, three-, five- and 10-year periods. Index-tracking non-strategic-beta funds beat their benchmarks more often than active-discretionary funds did. Morningstar attributes part of this to benchmark selection: over the 10 years ended Sept. 30, 2026, the S&P 500 returned 15.33% annually versus 15.05% for the Russell 1000, so index funds tracking different benchmarks can show different results. The author notes that survivorship bias inflates results for all groups, most of all for active-discretionary funds, because active funds are more likely to close. Even the cheapest active-systematic funds did not generate positive average annual excess returns on an equal-weighted basis over the decade.
On risk, active-discretionary funds had the highest tracking error over the 10 years, followed by active-systematic and strategic beta funds, with cap-weighted index trackers lowest. Active funds in both discretionary and systematic forms were slightly more volatile on average than index trackers, and their average maximum drawdowns were slightly deeper. Measured by Sortino ratio relative to style-appropriate benchmarks, the cheaper the grouping, the better its risk-adjusted performance, with non-strategic index trackers ranking highest.
Morningstar's author frames the findings as a basic analysis limited to trailing periods and excluding dead funds. The conclusions emphasize that cost remains central to outcomes, that investors seeking diversification without pure cap-weighted exposure may find active-systematic or strategic beta funds a better fit than a binary active/passive choice, and that active-discretionary strategies carry added agency risk and monitoring burden.
On costs, the analysis finds a spectrum rather than a clean divide. Active-systematic funds were on average cheaper than active-discretionary funds, and the gap widened when weighted by net assets. Among passive funds, index-tracking funds that were not classified as strategic beta were generally cheaper than strategic beta funds, largely because the biggest and cheapest value and growth index funds, such as Vanguard Value Index and iShares Russell 1000 Growth, are classified as strategic beta. Across all US equity funds, the asset-weighted average expense ratio for non-strategic-beta index trackers was 0.05%, compared with 0.59% for active-discretionary funds.
Success rates and excess returns follow the same pattern. Measured against style-specific indexes as of Sept. 30, 2026, cheaper groupings were more likely to outperform over most trailing one-, three-, five- and 10-year periods. Index-tracking non-strategic-beta funds beat their benchmarks more often than active-discretionary funds did. Morningstar attributes part of this to benchmark selection: over the 10 years ended Sept. 30, 2026, the S&P 500 returned 15.33% annually versus 15.05% for the Russell 1000, so index funds tracking different benchmarks can show different results. The author notes that survivorship bias inflates results for all groups, most of all for active-discretionary funds, because active funds are more likely to close. Even the cheapest active-systematic funds did not generate positive average annual excess returns on an equal-weighted basis over the decade.
On risk, active-discretionary funds had the highest tracking error over the 10 years, followed by active-systematic and strategic beta funds, with cap-weighted index trackers lowest. Active funds in both discretionary and systematic forms were slightly more volatile on average than index trackers, and their average maximum drawdowns were slightly deeper. Measured by Sortino ratio relative to style-appropriate benchmarks, the cheaper the grouping, the better its risk-adjusted performance, with non-strategic index trackers ranking highest.
Morningstar's author frames the findings as a basic analysis limited to trailing periods and excluding dead funds. The conclusions emphasize that cost remains central to outcomes, that investors seeking diversification without pure cap-weighted exposure may find active-systematic or strategic beta funds a better fit than a binary active/passive choice, and that active-discretionary strategies carry added agency risk and monitoring burden.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.