Morningstar - Q3 2024 - 5

Letter From the Editor
Active Goes on the Offensive
Jerry Kerns
Is the tide finally turning for active management?
No, active managers aren't suddenly outperforming
their indexes en masse-overall, their
record is still pretty dismal. And active mutual
funds are still losing assets, recently having fallen
below the asset levels of passive investments
for the first time, and there appears to be nothing
that can stem those outflows. But there is
good news for active managers: They are now
competing with passive managers on the popular
exchange-traded fund market. In this issue,
we examine the state of active investing and what
it means to investors.
To start, Morningstar's director of passive
strategies, Bryan Armour, and a team of analysts
write about the growing demand by investors for
active exchange-traded funds ( " Active ETFs
Riding High, " Page 23). In a short amount of time,
the number of active ETFs has ballooned to more
than 1,300. Armour et al. say this development
is a net positive for investors because it is lowering
the costs for active management. Still, not
everything is rosy-very few asset managers can
claim they've had successful fund launches.
And investors should be aware that not every asset
class is suitable for an active ETF vehicle-lack
of capacity constraints means that active ETFs are
best left for the most liquid areas of the market.
In a sign of the growing popularity of active
ETFs, noted active managers David Herro of Harris
Associates and Rajiv Jain, founder of GQG
Partners, were asked by an audience member
at the Morningstar Investment Conference
whether their strategies would become available
as active ETFs ( " Should US Investors Renew
Their Passports? " Page 50). Jain wasn't
enthusiastic because daily portfolio transparency
can hamper active management. Herro, however,
seemed resigned: " We'll look at meeting
the market's demands, " he said, " because sadly,
the mutual fund business isn't what it was
20 years ago. "
If it seems inevitable that active ETFs will supplant
mutual funds, Don Phillips is not convinced
that it would be a net good for the industry
( " Active's Last Stand? " Page 8). Phillips admits
that the ETF structure offers active managers some
advantages-namely the ability to lower
their fees and be more tax-efficient-but he says
that in the long run, it will hinder their ability
to play to their strengths and turn the tables on
passive. Morningstar's Ben Johnson, on the
other hand, argues that investors should embrace
" life after mutual funds " ( " Active ETFs Are Just
Getting Started, " Page 6).
Besides jumping into ETFs, active managers are
embarking on other strategies to build their case
to investors. As Morningstar director Russel
Kinnel details, mutual fund managers are finally
incorporating tax management into their investment
process ( " Active Funds Try to Raise Their Game, "
Page 33). Meanwhile, interval funds are also
providing active managers with an area of growth
and a way to distinguish themselves from passive
options. Morningstar associate director Brian
Moriarty gives us a deep dive on these funds that
offer everyday investors access to markets
previously reserved for institutional investors
( " Interval Funds: Are They Worth It? " Page 36).
And finally, there are just some markets that better
suit active investing, namely fixed income,
Morningstar director Eric Jacobson says ( " Why
Active Investing Works in Fixed Income, " Page 30).
Bond indexes are invaluable to investors,
but the fixed-income market is too fragmented and
inefficient for passive strategies to fully capture.
That leaves plenty of areas for active bond
managers to exploit. Unless there are radical
changes to the bond market, active managers still
have a chance to shine.
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Morningstar - Q3 2024

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