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No Clear Winner in Active vs. Passive Large-Cap Funds


Active Large Blend Category (%)

S&P 500 Index Funds (%)

1987 2.78 3.94
1988 15.85 15.26
1989 27.51 30.02
1990 -3.61 -3.59
1991 31.28 29.63
1992 9.24 7.00
1993 11.92 9.41
1994 -1.03 0.85
1995 33.24 36.90
1996 20.99 22.46
1997 29.66 32.74
1998 20.68 28.18
1999 21.68 20.34
2000 -0.36 -9.44
2001 -8.05 -12.11
2002 -19.86 -22.31
2003 29.51 27.57
2004 11.57 10.42
2005 6.72 4.44
2006 14.68 15.28
2007 7.76 4.95
2008 -36.29 -36.86
2009 29.10 25.88
2010 14.41 14.41
2011 -0.36 1.47
2012 15.39 15.68
2013 32.49 31.57
2014 11.07 13.26
2015 -0.18 0.93
2016 9.78 11.48
2017 20.67 21.32
2018 -6.51 -4.80
2019 29.05 30.94
2020 16.02 18.52
2021 25.62 28.18

Bold indicates winner 

Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. Data Sources: Morningstar and Hartford Funds, 2/22.

* Active Large Blend is made up of funds from the Morningstar Large Blend category that are not index or enhanced index funds.

* S&P 500 Index Funds are represented by the Morningstar S&P 500 Tracking category.

Reporters often prepare obituaries in advance for ailing celebrities so that when the end comes, they can publish instantaneously. Occasionally, someone hits “publish” prematurely, posting tributes for public figures who are very much alive.

In the same way, much ink has been hastily spilled recently in obituaries for active management. Most of the negativity has focused on the rise of passive investing, which has enjoyed strong performance during the past few years. But simply because one style of investing has come into favor does not mean others are going the way of the dodo.

So why are so many pundits ready to write off active management? And what makes us so sure that investing actively is not only a viable but essential part of investor portfolios?


What Have You Done For Me Lately?

Recency bias is the tendency to believe that recently observed patterns will continue into the future, and it’s a powerful force that can influence investor decisions. But investors who only take recent performance into account are missing the forest for the trees. After all, yesterday’s events shouldn’t determine how tomorrow’s investment decisions are made.

Morningstar Large Blend is the largest Morningstar category with $6.37 trillion in net assets, and it constitutes 23% of the US mutual fund market.1 We selected this category because it’s widely believed to be the most efficient—the one in which active investing supposedly makes the least sense.

To represent active management, we removed all index funds and enhanced index funds. To represent passive management, we used the Morningstar S&P 500 Tracking category.

As shown in FIGURE 1, passive large-blend strategies have outperformed active large-blend strategies for the last eight years, which helps to explain why in 2021 passive US equity funds had inflows of $346 billion, while more than $195 billion under active management headed for the exits.1

But the past seven years only tell part of the story. A wider look at the chart reveals active and passive have traded the lead in performance over time like two evenly matched racehorses. From 2000 to 2009, active outperformed passive nine out of 10 times. During the 1990s, passive outperformed active six out of 10 times. And over the course of the past 35 years, active outperformed 14 times while passive outperformed 19 times (they tied in 2010).

We’ve seen that the cyclical nature of active vs. passive investing definitely applies to the Morningstar Large Blend Category. The same holds true for other investment categories such as mid-caps, small-caps, and global/international equities. And just like performance, investor sentiment moves in cycles. If a certain style or asset class is doing well, investors are quick to extol its virtues and pour their money into it. It’s no surprise, then, that passive investing is the new darling of many investors and much of the financial press. But just as a marathon isn’t decided by the final 100 yards alone, we believe the dismissal of active management based on recent performance alone could be imprudent.


Active or Passive? Yes.

Like the ocean tides, active and passive management’s performance ebbs and flows. And as FIGURE 2 demonstrates, their performance cycles are clearly defined. The chart compares the rolling monthly 3-year performance percentile rankings for active managers with that of passive managers ranked within the Morningstar Large Blend category.

FIGURE 2 shows that while overall there is no clear winner over the past 30 years, there has been a clear winner in active vs. passive performance for multiple and sustained periods, followed by a trading of positions. Once again the recent outperformance of passive is evident, and is preceded by 11 years of dominance by active management, and so on.

The story that FIGURES 1 and 2 tell is clear. Just when it seems that active or passive has permanently pulled ahead, markets change, performance trends reverse, and the futility inherent in declaring a “winner” in active vs. passive is revealed anew.



Active and Passive Outperformance Trends Are Cyclical
Rolling Monthly 3-Year Periods (1987–2021)

Data Sources: Morningstar and Hartford Funds, 2/22.

Active Share: The True Measure for Active Managers

When it comes to active and passive, the debate isn’t as simple as an either/or choice. Many so-called active funds closely mirror the indices that serve as their benchmarks. These “closet indexers” offer no real value to active investors, and instead aim to slightly outperform the index by including a few different names. The problem, of course, is that this modest objective may not offer a real upside to justify the fees associated with active management.

Investors who are looking for a true active manager should examine the fund’s active share, or measure of the percentage of equity holdings in a manager’s portfolio that differ from the benchmark index. By examining active share, investors can get a clearer picture of how an active manager is adding value, instead of relying upon returns alone. It’s a critical metric when trying to determine which funds are truly active or passive.


The Active-Share Spectrum:


Home Runs: Part of the Cycle

Active/passive cyclicality is further demonstrated with high and low amounts of stock “home runs”—that is, a stock that outperforms the benchmark by 25% or more. Markets that feature large amounts of home runs signal dispersion in stock returns. High dispersion should benefit active managers who can single out the winners, whereas a low number of home runs indicates stocks are moving together, which typically benefits passive management.

In FIGURE 3, we’ve ranked the past 35 years from highest to lowest in terms of which stocks within the S&P 500 Index had the most home runs. The average number of home runs during this time period was 217. Sure enough, in years that feature a high number of home runs, active tended to outperform. And when there were fewer standouts, passive was the clear winner. It’s just another example of how the performance of active and passive management has remained faithful to cyclical trends.



Active Managers Have Generally Outperformed in High Dispersion Markets
S&P 500 Index (1987–2021)


Home Runs

% of HR

% Active Outperform

322 63%
2021 300 60% 27%
2019 290 57%
2002 272 53%
1992 269 53%
2004 264 52% 55%
258 50%
253 50%
243 48%
242 47% 32%
233 45%
2011 232 46%
2014 231 45%
1994 227 44% 24%
1993 226 45%
2007 218 43% 67%
2018 216 42%
2020 213 41%
1988 210 42%
2003 209 41% 48%
1991 205 41%
203 40% 50%
1987 201 41%
198 39%
184 35% 55%
2012 182 36% 48%
2006 180 36% 46%
1989 175 35%
2017 170 33% 43%
155 30% 26%
1996 151 30% 35%
1999 135 26% 44%
125 25% 22%
1998 114 22% 19%

Data Sources: Factset, Morningstar, and Hartford Funds, 2/22.


Active, Passive, and an Market Cycles

So what does cyclicality in active and passive management performance mean for you as an investor? We believe it demonstrates the importance of maintaining perspective and minimizing the undue influence of fickle market sentiment as you navigate changing market cycles. Instead of letting recent performance enchant you into chasing returns, you should instead consider current market conditions and what the future could hold.

Despite a 33-day bear market caused by the COVID-19 pandemic in early 2020, equities have generally risen for more than a decade (FIGURE 4).2 Not only that, the value of the S&P 500 Index has grown more than 605% since its low in March 2009.3

At the individual sector valuation level, the S&P 500 Index has a 20-year average price/earnings ratio (the ratio of a stock’s price to its earnings per share) of 16.2. As of December 31, 2021, the price/earnings ratio was 22.8. FIGURE 5 illustrates that 9 out of 11 sectors in the S&P 500 Index are trading at a premium relative to their 20-year historical average. Active managers have the flexibility to consider valuations when choosing stocks, while passive investments can’t use valuations as a consideration.

While bull markets can last quite some time, they’re not immune to occasional corrections (as measured by a loss of 10% or greater) to help keep them healthy. Like speed limits on highways, market corrections are a necessary evil in investing, but not one to be feared. They keep markets from becoming overinflated and prevent valuations from reaching heights that lead to damaging crashes. They can also provide opportunities for active management.


Equity Prices Have Generally Risen the Past Decade
S&P 500 Index Price Only (2000–2021)

Data Sources: Morningstar and Hartford Funds, 2/22.


Nearly All Sectors Are Above Their Historical Averages

S&P 500 Sectors

20 Yr Avg P/E


% Change

Communication Services
13.4 10.2 -24%
Consumer Discretionary
29.0 63%
Consumer Staples
18.4 23.0 25%
14.1 -11%
13.6 0%
16.2 18.3
16.4 22.8 39%
Information Technology
19.1 28.3 48%
17.5 0%
Real Estate
40.7 57%
21.9 39%
22.8 41%

Current P/E ratio is as of 12/31/21. Data Source: FactSet, 2/22.


Active Management Has Fared Better During Corrections

The most recent market correction arrived in February 2020. When corrections occur, you may not want to be exclusively invested in passive. Instead, you may want to consider investing in actively managed funds.

There have been 27 market corrections over the last 34 years. FIGURE 6 shows that during those corrections, active outperformed passive 19 times, with an average rate of outperformance of 1.68%.4 Again, we compared active to passive by removing index and enhanced index funds from the Morningstar Large Blend Category to represent active, and used the S&P 500 Tracking Index category to represent passive.

By allowing investors to respond to ever-changing markets, active management empowers investors to maximize opportunity as conditions demand. But if you’re invested in an index fund, you could be exposed to significant downside due to single-sector performance. For example, during the collapse of the dot-com bubble in 2000, active management outperformed passive significantly, -0.30% to -9.50%.5 Much of the blame for passive’s underperformance during that period can be laid at the feet of a single sector.

As FIGURE 7 shows, the technology sector made up 28% of the S&P 500 Index at that time. The sector (as represented by the S&P 500 Information Technology Index) crashed hard, to the tune of a 38.72% decline in 2000.

Meanwhile, the average active manager was underweight technology relative to the index (24% vs. 29%), which helped limit the damage done to their portfolios when the tech bubble burst. Active managers with a positive return during this time were more underweight to technology with a 14% average weighting, and those with a negative return hewed closer to the index with a 29% average weighting.6 Likewise, in 2014 when oil prices dropped significantly, passive investors were hurt by their inability to reduce exposure to an underperforming sector.

When bull markets inevitably turn, passive managers could be left holding stocks and sectors with poor fundamentals and inflated valuations. Meanwhile, active managers have the ability to help mitigate risk by reducing exposures to expensive areas that will be hit hardest, and conversely, increase exposure as sectors or asset classes recover to capture upside as the new market cycle begins.



Active Management Has Taken Corrections in Stride


Active Management Large Blend

S&P 500 Tracking 12/31/21


-22.27 6.43
-13.64 -16.64 2.99
-9.79 -12.08 2.29
-9.15 0.11
-18.36 -18.86 0.51
-10.61 1.29
-19.12 -0.77
-10.89 -9.77 -1.12
-11.36 -11.84 0.48
-10.91 0.28
-26.88 6.57
-25.78 1.44
-31.14 2.96
-18.00 -18.80 0.79
-13.04 -14.11 1.07
-16.13 -17.93 1.80
-36.27 -36.14 -0.13
-15.80 -15.16 -0.63
-24.31 -24.60 0.29
-25.01 -27.00 1.99
-15.40 -15.50 0.10
-20.19 -18.59 -1.60
-11.57 -11.88 0.31
-13.61 -12.74 -0.87
-9.75 -9.99 0.24
-14.21 -14.05 -0.16
-34.12 -33.51 -0.61
Average Outperformance 1.68
Active Wins 19
Passive Wins 8

Data Sources: FactSet, Morningstar, and Hartford Funds, 2/22.


Index Funds: Individual Sectors Can Have Outsized Impact
1/1/2000–12/31/2000 S&P 500 Index Sectors


% Average Weight

% Total Return

% Impact on Performance

Communication Services
6.75 -38.82 -3.02
Consumer Discretionary
9.78 -23.61 -2.63
Consumer Staples 8.65 5.35 0.45
Energy 6.47 19.96 1.10
Financials 15.42
19.87 2.62
Healthcare 11.66 38.35 3.64
8.84 3.24 0.15
Information Technology 28.34 -38.72
Materials 2.00 -16.41 -0.38
Real Estate 0.10 -26.65 -0.03
1.98 53.59

Data Source: FactSet, 2/22.


Investment Implications:

This insight focused on active vs. passive investing in the Morningstar Large Blend category because it’s widely believed to be the most efficient category—the one that should invariably favor passive investing. Yet even this category shows the cyclical nature of active and passive performance. The same cyclicality is present in other investment categories such as mid-caps, small-caps, and global/international equities.

Just as we think declaring active management dead is premature, we don’t contend that active management is the only suitable choice for investors. Far from it. We believe that the choice between active and passive management is not a zero-sum game, but that each has a place in investor portfolios based on the individual needs and wants of the investor. With that in mind, here are some conclusions to take away from this piece:

  • The performance of active and passive management has been cyclical—each style has experienced extended periods of outperformance.
  • When evaluating active and passive management, looking beyond recent performance and measuring active share is important.
  • As we saw in February 2020, market corrections are inevitable and a common occurrence in equity markets over time.
  • There have been 27 market corrections over the past 35 years, and active management outperformed passive management in 19 out of 27 corrections.
  • During market corrections, the flexibility of active management allows for reducing exposure on the downside and ramping up exposure to capture alpha7 in the early stages of recovery.

Talk to your financial professional about the benefits of incorporating active management into your portfolio.


1 Data Source: Morningstar Direct, 2/22.

2 Data Sources: Ned Davis Research and Hartford Funds, 2/22.

3 Data Sources: Morningstar and Hartford Funds, 2/22.

4 Data Source: Ned Davis Research, 2/22.

5 As represented by the S&P 500 Index, from 1/1/00 to 12/31/00.

6 Data Source: Morningstar, 2/21.

7 The measure of the performance of a portfolio after adjusting for risk. Alpha is calculated by comparing the volatility of the portfolio to some benchmark. The alpha is the excess return of the portfolio over the benchmark.

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Investing involves risk, including the possible loss of principal.

Hartford Funds Distributors, LLC, Member FINRA.

WP287 227968

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