Active Equity Fund Benchmarking: See How Funds Compare to the Competition

Active managers have to compete for investor attention and assets in a crowded field of options.

With accurate benchmarks, asset managers can identify where their strategies and team resources stand out from the competition, and how they stack up against available funds on the market. Asset allocators will also find the report helpful to evaluate the firms and strategies they invest with.

Our researchers reviewed data on all US-domiciled domestic and international active equity funds, sourced from Morningstar Direct. We also collected team-level data by surveying nearly 50 active equity teams, from small boutiques to leading fund families, with a collective USD 1.5 trillion in assets. For true, apples-to-apples comparisons, fund data is organized by Morningstar Category.

Use these benchmarks as a point of reference for where active equity funds sit in the available landscape. For more benchmarks on performance, asset allocation, and investment teams, download the active equity fund report.

Here are a few key findings.

Some active managers claim they are more patient than the competition, arguing their low turnover evinces discipline amid market volatility.

But what is ‘low’? Lower than many might think.

The majority of the nearly 3,000 funds across Morningstar’s broad US and international style box categories had turnover below 40%. The median annual turnover for global large-cap growth funds was just 28%. Even the 75th percentile for turnover was in the 50%-range for some categories. These data points suggest a buy-and-hold approach is closer to the standard than the exception.

In our survey, most asset-management firms averaged a handful of research personnel per distinct investment strategy. The median firm had 2.7 researchers per strategy. The data displayed a right-skewed distribution with some teams as outliers—the 95th percentile of firms had 7.5 research personnel dedicated to a specific strategy.

Portfolio managers also often oversee multiple funds. Based on firm averages, the portfolio manager at the median shop oversees 2.2 investment strategies. A quarter of firms reported that their managers ran between 3.5 and 6 distinct strategies, on average.

Morningstar Direct is home to more data points on the individuals and firms that manage funds, including:

• One- and five-year manager retention rates
• Average manager tenure
• Manager experience and education
• Percentage of assets with a specific range of average manager tenures
• Percentage of assets with a specific range of manager investments

Higher numbers of portfolio holdings can spread out investment risk across companies and increase the odds of picking an outperforming stock. However, including too many portfolio holdings comes with diminishing diversification benefits and can make it hard to differentiate from a passive index.

Large-blend funds in the United States tended to be more concentrated than funds with more international exposure. The median foreign large-blend fund had 109 holdings, compared to 67 holdings for the median large-blend fund in the United States.

Small-cap fund managers also have to contend with capacity issues that affect their stock selection decisions. As these funds grow in assets under management, they may face difficulties in buying or selling securities without affecting the market price in less-liquid corners of the market.

In our research, the median small-blend fund held 98 equities, compared to a median 67 holdings for mid-blend funds.

For a deeper understanding of portfolio contents, holdings look-through analysis can highlight the drivers of outperformance for your funds or competing ones. Explore how individual holdings contribute to risk exposures and asset allocations.

Active managers make strategic bets to outperform the market, diverging from their benchmark indexes with individual security selections or adjusted portfolio weights. Those decisions introduce active risk for investors.

To explore how much portfolio management decisions influence a strategy, we use the active share data point. It measures the proportion of a portfolio’s equity assets that are invested in a way that diverges from the category benchmark. Active share ranges from 0%, for portfolios that exactly replicate the index, to 100%, for portfolios with only nonbenchmark holdings.

Small-cap funds tended to have the highest active share compared to their mid- and large-cap counterparts. The median large-blend fund had a 61% active share, hewing closer to its target benchmark and its higher exposures to the top 10 stocks. The median small-blend fund had a 93% active share.

For more individual comparisons, investment teams can customize portfolio analysis in the Morningstar Direct application. Analysis can create blended benchmarks from one or more market indices or proxies to compare to their portfolios.

Done right, competitive analysis can surface the strengths and weaknesses of an investment strategy and help you take charge of opportunities for differentiation. Explore how active equity funds compare across additional categories in the full report:

• Performance
• Asset allocations
• Fund size
• Resources and workloads of investment management teams

Morningstar Direct offers more industry-leading fund-level data sets for more comprehensive competitor’s analysis. Our global database includes thousands of data points and exclusive analyst ratings that pass strict quality checks.