Active South African equity funds delivered strong short-term results in 2024, with 83.6% outperforming their passive peers, according to Morningstar Investment Management South Africa’s inaugural Active/Passive Barometer.

However, over a 10-year period, the success rate for these funds drops sharply to just 25.5%, underscoring the difficulty of sustained outperformance.

The report evaluates the performance of active funds relative to comparable passive strategies across a range of Morningstar categories.

It highlights areas where active management has delivered value, and where low-cost passive options have proven more resilient.

Michael Dodd, senior fund analyst at Morningstar Investment Management SA, said: “The Active/Passive barometer is a useful tool that can help investors calibrate their odds of succeeding with active funds in the different areas based on recent trends and longer-term history.”

Morningstar maintains that both approaches – active and passive – have a role in building diversified, cost-effective portfolios.

“Our research shows that low-cost investing is a sure-fire way to improve outcomes but there are also times where it can be justified to pay for active management. This report aids us in understanding key trends that help inform investment selection and implementation when building client portfolios,” Dodd added.

Key findings from the report:

• Short-Term Outperformance in SA Equity: Active South African equity managers had a standout year in 2024, aided by strong performance in mid- and small-cap segments, which provided broader opportunity sets than the large-cap-dominated FTSE/JSE Top 40. However, only one in four active managers outperformed over the last decade.
• Global Equity Remains Tough Terrain: Active global equity funds struggled in 2024. Just 13.8% outperformed in the Global Large-Cap Blend category, and only 3.9% beat passive peers over 10 years. Global emerging markets fared slightly better, with a 10-year success rate of 20.1%.
• Opportunities in Bonds and Property: Active South African diversified bond funds delivered moderate outperformance, with a 55.2% one-year and 59.5% five-year success rate. The South African property category also showed long-term promise—60.5% of active funds beat passive peers over 10 years, though only a third outperformed in 2024.

Active South African property managers had a difficult 2024, with a one-year success rate of 33.3% in what was a strong year for the local sector.

“Over the long term, active managers have demonstrated their value over passive competitors in this category, with a 10-year success rate of 60.5%. This level of success compares favourably with the results of active managers in the Global property category, where the 10-year success rate of 20.8% is much lower,” said Dodd.

• Trend Consistency with Global Findings: Echoing Morningstar’s barometers in other regions, the South African data shows that while short-term active outperformance is not uncommon—especially in equities—longer-term success is much harder to sustain.

“One year is not a sufficient time horizon from which to draw conclusions, as success rates can fluctuate from year-to-year based on market conditions. Longer horizons, though, provide stronger signals that investors can incorporate into their decision-making process,” said Dodd.

Dodd also noted the structural uniqueness of the South African market. He said that globally, investors have increasingly converged toward low-cost investments, with a large-scale shift from active to passive strategies.

However, South Africa has lagged this trend. Active investing still plays a far more prominent role locally, largely due to differences in market structure and development.