Do active funds beat the index?

Most do not over the long term, especially after fees. Research shows a majority of actively managed funds underperform their benchmark over time. That is a strong argument for choosing carefully. Concentration, a clear process and discipline are the right conditions for active management, but past performance is not a guarantee of future results.

Why choose active management if index funds are cheaper?

Because an index fund by definition can never beat the index - it is the index. It buys everything, including the companies you would rather avoid. An active manager with a genuine process can exclude what lacks quality and focus on what has the best prospects. But that requires the manager to actually deliver.

What is closet indexing?

An actively managed fund that in practice tracks the index very closely, despite charging an active fee. High correlation with the index and low active share indicate closet indexing. It is the worst possible combination: an active fee with no chance of beating the index.

What is active share?

Active share measures how much a fund's portfolio deviates from the benchmark. 100 percent means no overlap at all. Zero means the fund is identical to the index. High active share is a prerequisite for performing differently from the index, but does not guarantee that the active choices are right.

Glossary

Active Fund Management

A management strategy where the portfolio manager actively selects stocks, unlike a passive index fund that mechanically tracks a benchmark. The goal is to generate returns above the index.

What it is

The difference between index and analysis

An actively managed fund means the portfolio manager makes deliberate decisions about which companies to hold, how large the positions should be and when to buy and sell. This differs from passive management, where the fund mechanically replicates an index without any active choices. Active management is more expensive and requires that the manager's selections actually add value. Otherwise an index fund is better. That is a legitimate demand.

Selectivity: An active manager can exclude companies that do not meet the criteria, whether quality, valuation, leverage or sustainability. An index fund owns everything in the index regardless.
Concentration: Active management enables higher concentration in the companies the manager has strongest conviction about. An index fund may own hundreds, an active fund can focus on the best 25 to 35.
Freedom to wait: An index fund must maintain index weights. An active manager can raise cash when there are no attractive investments, and wait for the right opportunity.

In practice

Active management requires genuine conviction

We own 25 to 35 companies we understand and have bought with a margin of safety. Every position is an active choice. Being slightly different from the index is not enough. If the portfolio does not deviate sufficiently, one pays an active fee for what is in practice passive exposure. What creates the conditions for outperformance is concentration, a clear process and the discipline to stick to it even when the market disagrees.

“We follow our process slavishly. We will make mistakes, but not by deviating from it.”

Amos Fonder

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Common questions about active management

Related concepts

Glossary

Net asset value

The value of a company's underlying assets minus its liabilities. Primarily used when analysing investment companies and asset-heavy businesses.

Fundamental Analysis

The method of analysing a company's financials, business model, and competitive position to assess its true value. The foundation of conviction-based active management.

ISK (Investment Savings Account)

The most common account type for fund savers in Sweden. You pay a flat-rate tax based on the account's value rather than capital gains tax on every sale.

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