Active managers face selection test: Morningstar

The active versus passive debate is increasingly becoming a question of manager selection, with Morningstar finding the best active managers continued to generate excess returns despite passive strategies generally outperforming across most Australian investment categories.

Morningstar's 2026 Australia Active/ Passive Barometer, covering more than 800 Australian domiciled managed funds and ETFs across nine categories to June 2026, found passive strategies had the edge over the past year, contributing to weaker 10-year active fund success rates.

However, top-quartile active managers deliver positive excess returns over the decade in seven of the nine categories analysed.

Morningstar senior analyst Zunjar Sanzgiri said passive strategies generally outperformed their active counterparts over the past year, weighing on active managers' longer-term success rates.

"Passive strategies outperformed active peers across most segments over the past year, leading to a decline in trailing 10-year success rates across much of the study," Sanzgiri said.

"Even so, top-quartile active managers in seven of the nine categories delivered positive excess returns over the decade. The results suggest there are opportunities for outperformance but are increasingly concentrated among a shrinking pool of managers."

Australian mid- and small-cap equities remained one of the stronger areas for active management, with Morningstar pointing to persistent market inefficiencies, lower research coverage and a broader opportunity set than passive indices can capture.

Fixed income also emerged as a relative bright spot, with higher interest rates and greater market volatility creating opportunities for managers to actively adjust duration and credit exposures.

The results were less favourable for Australian equity income strategies. The category's 10-year-active fund success rate fell from 52% to 9% in a single year, after strong returns from dividend focused passive strategies.

Morningstar also highlighted the importance of fund survival in assessing active management. Its revised methodology now incorporates whether funds survive the full measurement period alongside their relative performance, meaning closures and mergers can weigh on active-fund success rates.

The findings suggest while passive strategies continue to hold a broad advantage across Australian markets, active management remains capable of adding value in certain segments, particularly where market inefficiencies or greater scope for security selection exist.