What is an Active Fund?
An active fund employs portfolio managers who research and select individual securities, aiming to beat a benchmark index. These managers analyze financial statements, economic trends, and company prospects to make buy and sell decisions. Active funds typically charge 0.50-1.50% in annual fees compared to 0.03-0.20% for index funds.
The Active vs. Passive Debate
SPIVA data shows that over 15-year periods, roughly 90% of active large-cap funds underperform the S&P 500. The odds are somewhat better in less efficient markets like small-cap stocks or emerging markets, where skilled managers may find mispriced securities. Past outperformance does not reliably predict future results.
Key Considerations
If you choose active funds, focus on those with low fees, consistent investment processes, and significant manager co-investment. The higher the fee, the larger the performance hurdle the manager must clear. Many investors use a core-satellite approach: index funds for the bulk of the portfolio with selective active funds in niche areas.