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While some active fund categories, such as Japanese stocks and bonds, have shown consistent success rates, Japan’s actively managed funds have underperformed comparable passive strategies over the long term, according to Morningstar.
The first Japanese version of the research firm’s flagship Active/Passive Barometer report examines 1,592 open-end and exchange-traded funds domiciled in Japan over 1, 3, 5, 10 and 15-year periods ending September 2024. was analyzed.
The report shows that Japan’s active funds have lower success rates compared to a combination of similar passive strategies across many asset classes and categories, and is in line with Morningstar research findings in other regions. The same is true.
In this report, success rate refers to the probability that an active fund in a category outperforms the average performance of an index fund in the same category.
This article was previously published by Ignites Asia, a title owned by FT Group.
About a third, or 36%, of Japanese equity funds outperformed comparable passive strategies in the year to the end of September.
However, the proportion of active equity funds outperforming passive funds fell dramatically to just 24% over three years, 27% over five years, 14% over 10 years, and about 20% over 15 years, the report showed. . .
This trend is similar for bond funds. As of September, nearly half (47%) of active strategies outperformed passive strategies over the year.
However, over 10 years, the outperformance rate fell to just 33 percent, and over 15 years it fell further to 23 percent.
However, the report’s co-authors, Morningstar board member Daisuke Motori and analyst Risa Mizuta, said it was “important not to generalize” this poor performance to all active funds.
They noted that there were certain categories of equity funds that had higher success rates for active funds than other categories over the long term.
Topping the list is Japan’s large-cap blended equity fund, which has a 20% success rate over 10 years, compared to a 14% success rate for similar passive funds, according to the report. Ta.
Excluding outdated funds, the success rate for this category improved to approximately 40%.
Morningstar noted that in Japan, liquidations are not based purely on poor performance, as funds are also liquidated after reaching a pre-determined target date or net asset value.
As such, the 40% success rate was “more meaningful than it appears,” especially since no other global equity category had a higher success rate than Japanese stocks.
By comparison, Japan-based North American funds and funds focused on global equities had success rates of 11.9% and 10.3% over five-year and 10-year periods, respectively.
Emerging market equity funds, on the other hand, have consistently had lower success rates, at only about 20% over the entire period. Morningstar noted that this could be due to heavy exposure to Chinese stocks, which have underperformed in recent years.
Bond funds, on the other hand, have generally had higher success rates over the past three years.
This is especially true in categories that are not sensitive to currency fluctuations, such as Japanese bonds (68%), hedged U.S. bonds (56%), and hedged global bonds (60%).
However, the success rate of active funds tended to decline over time. For global bond funds, excluding Japanese bonds, the 10-year success rate fell to 20% from 51% over three years.
Morningstar’s report found that more than two-thirds of all-Japan equity funds underperformed the S&P Japan 500 in the six months ended June, compared to the S&P Dow Jones Index. This is consistent with similar findings, including a recent analysis of
Furthermore, according to Morningstar’s Mind the Gap Japan 2024 report, the average investor in a Japanese passive fund could add up to 3 percent to their take-home return relative to the fund’s total return between 2019 and 2024. I enjoyed the difference.
*Ignites Asia is a news service for professionals in the asset management industry published by FT Specialist. Trials and subscriptions are available at ignitesasia.com.