The Morningstar China Active/Passive Barometer is an annual report that measures the performance of onshore China-domiciled active funds against their passive peers over both short- and long-term periods. It is a useful measuring yardstick that can help investors calibrate the odds of success of active funds in various areas based on recent trends and long-term history.
Despite a notable rebound in the A-share market towards the end of 2024, the China equity market saw swift rotations among select pockets of cyclical growth industries, posing greater challenges for active managers in seeking excess returns. As of the end of 2024, the proportion of actively managed diversified stock-heavy funds beating their passive peers significantly deteriorated over the past one- and three-years. Notably, less than 20% managed to do so in the past year (see Exhibit 1). Diversified stock-heavy funds invest in a broad investable universe compared with the sector-focused stock-heavy funds, herein referred to as “stock-heavy funds” in the report.
Our study revealed that investors continue to face a long-standing challenge: they have struggled to pick the active funds that would have delivered stronger excess returns. The asset-weighted average returns of active stock-heavy funds have generally lagged their equal-weighted averages. This indicates that, overall, investors have struggled to pick the active funds that would have delivered stronger excess returns—a pattern that holds for active sector funds, too. The asset-weighted average better reflects investor preferences and aligns more closely with the overall returns experienced by investors.
Exhibit 1: Actively Managed Stock-Heavy Funds Are Finding It Increasingly Difficult to Generate Excess Returns
Active Funds Less Likely to Beat Passive
Active funds across all three stock-heavy fund groups in our study —large blend funds, large growth funds, and small/mid-cap funds —saw their one-year success rates collapse in 2024. Only 13% of stock-heavy active funds managed to outperform the asset-weighted average return of their passive peers, which was a staggering 52-percentage-point drop from 2023. The fallout extended to three-year success rates, which slipped below 50% across all three stock-heavy fund groups from 58.7% to 74.5%.
Exhibit 2: Year-Over-Year Success Rates of Active Stock-Heavy Funds in China
Actively managed large growth funds were hit the hardest, with their one-year success rate shrinking from 70.4% in 2023 to just 9.7% in 2024. This stemmed from the dominance of large-scale passive funds tracking the ChiNext, ChiNext 50, and STAR 50 indexes. These index trackers, which typically channel 30-50% of their assets to the technology sector, delivered strong performances in 2024, driving up the asset-weighted return of passive peers in the group.
Active large blend managers delivered remarkable excess returns compared to their passive peers over the past five and ten years, but their edge has significantly eroded in the last one and three years. Worried about shrinking interest margins and lingering asset quality risks, they underweighted banking and non-bank financials, two value-driven sectors that surged in 2024. That call dragged on their returns. Passive funds in the same group, on the other hand, rode the wave. The bigger passive players track the CSI 300 and SSE 50 indexes, which concentrated their allocations in the banking, non-bank financials, and electronics—areas that thrived in 2024.
Active small/mid-cap funds recorded a one-year success rate of 38.2% in 2024. It’s a step down from 2023’s 49.6%, but they still led the pack among the three stock-heavy fund groups. Over the long term, active small/mid-cap funds also tended to have higher success rates than active large-cap funds. Small/mid-cap stocks aren’t priced as efficiently as large caps, which presents more investment opportunities for active managers.
Active Fund Success Differs Across Sectors
When it comes to sector funds in China, the passive peer groups tend to be heterogenous and are not always representative of the broader sector exposures. Combined with the extreme asset concentration in certain passive funds within the peer group, and the divergent sub-industry performances within each sector year in, year out, means that the success rates for sector funds can be volatile year on year.
Exhibit 3: Year-Over-Year Success Rates of China Active Sector Funds
Among the three sector fund groups, active consumer funds had the highest success rate in 2024, although there was more than met the eye. Their triumph benefited significantly from what the passive peer group looked like. The large passive funds here track the CSI Liquor Index, which suffered a dramatic 17.1% loss in 2024, the worst among passive consumer sector indexes, while the CSI China Mainland Consumer Index rose by 4.9%. The few but large liquor-tracking passive funds dragged down the asset-weighted average return of the passive composite, inflating the active funds’ success rate.
Active funds in the healthcare sector experienced a drop in their one-year success rate, falling from 74.4% in 2023 to 58.9%. Nevertheless, they maintained the highest three- and five-year success rates among the sector groups. Active funds in the technology and communications sector present a much bleaker picture. They struggled to compete with the large-scale passive peers focused on segments like the STAR Market and semiconductor industry, with their one-year success rate dropping from 45.5% in 2023 to just 19.8% in 2024.
For the full report on The Morningstar China Active/Passive Barometer: Year-End 2024, please visit: https://www.morningstar.com/en-hk/business/insights/research/china-active-passive-barometer
