Morningstar's 2025 Scorecard Is In: Only 38% of Active Fund Managers Beat Their Passive Peers, and the Decade-Long Numbers Are Even More Damning

Every year, Morningstar publishes what amounts to a performance review for the entire active fund management industry. And every year, the results arrive with the grim predictability of a report card that never improves. The 2025 edition of the Active/Passive Barometer, released this week, is no exception.

Just 38% of active funds both survived and outperformed the asset-weighted average of comparable passive funds in 2025, a decline of four percentage points from 2024. The analysis spans roughly 9,248 unique funds representing about $26 trillion in assets, or approximately 67% of the entire U.S. fund market.

For the millions of American investors still paying higher fees for active management, the data poses an uncomfortable question: at what point does hope become an unreasonable investment thesis?

The One-Year Numbers Tell a Familiar Story

U.S. equity managers posted a 37% success rate for the year ended December 31, 2025, slightly below their 2024 results. This means that nearly two out of every three actively managed U.S. stock funds failed to justify their existence relative to a simple, low-cost index alternative.

The underperformance was not confined to one corner of the market. Active funds in bond categories, which have historically been friendlier terrain for stock pickers, also underwhelmed in 2025. Real estate funds, another category where active managers have traditionally added value through property selection and timing, similarly fell short.

The lone bright spot, if it can be called that, was international equity. Active managers in certain non-U.S. categories posted marginally higher success rates, benefiting from the dispersion and inefficiency that characterize markets outside the United States. But even in international categories, the majority of active managers still failed to beat their passive benchmarks.

The Decade View Is Where the Case Becomes Overwhelming

If the one-year numbers are discouraging, the ten-year figures are devastating. Over the decade ending December 31, 2025, only 21% of active funds both survived and outperformed their passive alternatives. Nearly four out of five active funds either closed, merged into other vehicles, or delivered returns that lagged a simple index fund.

This 21% success rate is not a cherry-picked statistic from one unfavorable period. It is the compound result of a structural disadvantage that active managers face in every market environment: fees. The average actively managed U.S. equity fund charges an expense ratio of roughly 0.65% per year, compared to 0.05% or less for many broad-market index funds. That 60-basis-point annual gap may sound trivial, but compounded over a decade, it represents a headwind that the vast majority of stock pickers simply cannot overcome.

Morningstar's own analysis confirms this mechanism. When the firm sorts active funds by fee quartile, the cheapest funds consistently post the highest long-term success rates. The most expensive funds post the lowest. The pattern holds across virtually every asset class and time period studied.

Why This Matters More in 2026 Than It Did a Decade Ago

The passive investing revolution is no longer a fringe movement. Index funds and exchange-traded funds now hold more than $15 trillion in U.S. assets, surpassing actively managed funds for the first time in history during 2024 and extending that lead through 2025.

This shift has created what some industry observers call a self-reinforcing cycle. As money flows out of active funds and into passive vehicles, the remaining active managers face a shrinking pool of mispriced securities to exploit, making it even harder to generate alpha. The rising tide of passive capital also increases the correlation among stocks within an index, further compressing the opportunities for active differentiation.

For individual investors, the implications are straightforward. Every dollar paid in excess fees to an active manager who fails to outperform is a dollar subtracted from retirement savings, college funds, or long-term wealth building. Over a 30-year investment horizon, the cumulative drag of a 0.60% annual fee difference on a $500,000 portfolio amounts to more than $250,000 in foregone wealth.

The Active Management Industry's Counterargument

Defenders of active management point to several legitimate rebuttals. First, the Morningstar data measures averages. Within the 38% that outperformed in 2025, some managers delivered substantial alpha that more than justified their fees. The challenge, of course, is identifying those managers in advance, a task that has proven nearly as difficult as beating the market itself.

Second, active managers argue that their value proposition extends beyond raw returns. Risk management, downside protection, and the ability to navigate specific market dislocations are benefits that do not always show up in a simple performance comparison. During the sharp market selloffs of early 2020 and late 2022, some active managers did meaningfully reduce losses relative to their benchmarks.

Third, certain asset classes remain structurally more favorable for active management. Small-cap equities, high-yield bonds, and emerging market debt are areas where information asymmetry and illiquidity create genuine opportunities for skilled managers to add value. Morningstar's own data shows modestly higher success rates in these categories over longer time horizons.

What the Smart Money Is Actually Doing

The flow data tells the real story. In 2025, investors pulled approximately $450 billion from actively managed U.S. equity funds while adding more than $600 billion to passive alternatives. This is not a temporary rotation. It is a structural reallocation that has persisted for 15 consecutive years and shows no signs of reversing.

Institutional investors, including pension funds, endowments, and sovereign wealth funds, have been at the forefront of this shift. CalPERS, the largest public pension fund in the United States, moved to a predominantly passive equity allocation several years ago and has seen its costs decline while its performance has kept pace with or exceeded its actively managed peers.

Even within the active management industry, the firms that are thriving are those that have dramatically lowered their fees to compete with passive alternatives. Fidelity, Vanguard, and Dimensional Fund Advisors have all launched low-cost active strategies that blur the line between active and passive, using systematic, rules-based approaches rather than traditional stock picking.

The Practical Takeaway for Every American Investor

Morningstar's 2025 data does not mean that active management is worthless. It means that the odds are stacked against the average active fund, and that the single most reliable predictor of future fund performance is not past returns, star ratings, or manager tenure. It is fees.

For the vast majority of Americans saving for retirement through 401(k) plans, IRAs, or taxable brokerage accounts, the simplest path to better outcomes is also the cheapest: a diversified portfolio of low-cost index funds, rebalanced periodically, held through market cycles with the discipline to avoid emotional buying and selling.

That approach will not win any cocktail party debates about stock picking. But over the past decade, it has quietly beaten 79% of the professionals who were paid to try.