Funds & wrappers
Active management
Choosing holdings deliberately in an attempt to beat a benchmark.
How it works
Active managers research, select and time positions, charging more for the attempt. The bar is high: they must beat the index by enough to cover their fees.
Long-run studies consistently find the majority of active funds underperform their benchmark over ten years or more, with the proportion rising as the period lengthens.
Where it misleads people
Past outperformance is a weak predictor of future outperformance. Persistence studies find little evidence that top-quartile managers stay there beyond what chance would produce.
Related terms
- Index fundA fund that aims to match an index rather than beat it, at very low cost.
- AlphaReturn above what the risk taken would ordinarily have earned — the part attributable to skill.
- Active shareHow much a fund’s holdings differ from its benchmark, as a percentage.
- Expense ratioThe annual percentage of your money a fund takes to cover its running costs.
- Survivorship biasThe distortion caused by measuring only the things that made it, and ignoring the ones that failed.
Mentioned in
More in Funds & wrappers
- Transaction costs
- Cash drag
- Target-date fund
- Distribution
- Synthetic ETF
- ETF
- Private equity
- Premium and discount
All 25 Funds & wrappers terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.