Actively Managed Funds: What You Need to Know

Actively managed funds are a type of investment where a professional manager actively selects and buys individual stocks, bonds, or other securities to create a portfolio tailored to the investor's goals.

Actively managed funds aim to beat the market's performance, but they often come with higher fees than index funds. This is because the manager's expertise and time are factored into the cost.

The average actively managed fund charges around 1.3% in fees annually, which can add up over time. For example, a $10,000 investment could pay $130 in fees each year.

Investors should carefully consider whether the potential benefits of an actively managed fund outweigh the costs, especially if they're looking for long-term growth.

Our size and reputation allow us to carefully select partners from across the globe. We build deep relationships with their investment teams and continually evaluate their performance.

You can choose to add both funds and individual securities to your portfolio, and it matters. This flexibility gives you more control over your investments.

Active fund performance varies across investment categories and periods, making passive investing not the clear winner yet. In some regions, active management remains the dominant approach in assets under management.

Actively managed funds try to beat market returns with investments hand-picked by professional money managers.

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Active funds are designed to outperform their benchmarks, which can be a market index or a specific industry. They aim to beat the market returns by hand-picking securities and trading them actively.

Actively managed funds typically have higher fees than index funds, with an average expense ratio of 0.50% to 0.75%. This is because they employ a team of active managers who work to outperform the market.

The investment objective of an active fund is to outperform its benchmark, whereas index funds aim to mirror the performance of their benchmark index. For example, a large-cap actively managed fund might seek to outperform the S&P 500, while a large-cap index fund would aim to deliver the same results as the S&P 500.

Here are some key differences between actively managed funds and index funds:

Active funds aim to beat market returns by hand-picking securities, but this approach comes with higher fees and less tax efficiency than passively managed funds.

Investors who support active management don't believe in the stronger forms of the efficient market hypothesis (EMH), which suggests it's impossible to beat the market over the long run.

Actively managed funds generally have higher fees, which can be a significant cost for investors, with an average expense ratio of about 0.50% to 0.75%.

The investment objective of active funds is to outperform their benchmark, whereas index funds simply seek to mirror the performance of its benchmark index.

A large-cap actively managed fund might seek to outperform the S&P 500, whereas a large-cap index fund that tracks the S&P 500 would aim to deliver the same results as the index itself.

Here's a comparison of index funds and active funds:

Active funds can be more tax-efficient if managed correctly, but this requires active management, which can be costly.

Active funds and ETFs can be invested in a wide range of different equities, bonds, and other securities.

Both types of funds can track a specific index, such as the Russell 2000 small-cap index.

You might have an actively managed ETF that's invested in small-cap companies, giving you the potential for higher returns.

Active funds can also be invested in small-cap companies, offering a similar investment opportunity.

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Actively managed funds pursue the funds' objectives without taking excessive risk, focusing on creating long-term value for investors.

Strategies for active management may include researching a mix of fundamental, quantitative, and technical indications to identify stock selections.

Professional investment managers are employed by many investment companies and fund sponsors to manage their mutual funds, aiming to outperform the market and adjust to ever-changing market conditions.

For another approach, see: Market Development Funds

Small-cap equity funds have been relatively kind to active managers in the long term, with nearly 38% of active funds succeeding over the past decade.

This is likely due to the fact that the small-cap market is less efficiently priced, giving active managers more opportunities to find mispriced stocks.

The wide dispersion of small-cap fund performance can spark volatile short-term results, but the longer-term signal has remained intact.

It's worth noting that this is a higher rate of success than the US large-cap, US mid-cap, and foreign-stock cohorts over the same span.

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Diversify your assets by partnering actively managed funds with index funds. This combination broadens diversification in your overall portfolio.

You can strategically choose actively managed funds for your portfolio with your long-term goals in mind, ignoring short-term market volatility. This approach helps you stay focused on what's truly important – your long-term goals.

There are funds for every investor, so find one that's right for you.

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Active fund performance can vary greatly depending on the category and time period. About 51% of active strategies survived and beat the average passive fund in their Morningstar Category over a recent 12-month span.

To assess an active manager's track record, consider factors such as the people managing the portfolio, their process, and whether the parent firm aligns its interests with investors. Interactive research tools can help portfolio managers perform complex analyses faster than ever.

Over 10 years ending in 2021, active managers who invested in domestic small growth stocks were most likely to beat the index, with 88% of active managers in this category outperforming their benchmark index before fees were deducted.

Actively managed funds can add value to your portfolio because they offer an opportunity for outperformance. However, there's also the possibility they may underperform. It's essential to have realistic expectations when investing in active funds.

Some active fund categories have historically outperformed their passive counterparts. For example, 85% of Fidelity's equity funds have beaten their benchmark over the manager's tenure.

Our disciplined investment approach is centered around creating long-term value, which means we pursue the funds' objectives without taking excessive risk.

We believe in investing for the long term, ignoring short-term market volatility and choosing actively managed funds that align with your goals.

There are funds for every investor, so it's essential to find one that's right for you and your unique financial situation.

We strategically select actively managed funds to ensure they're a good fit for your portfolio and long-term objectives.

By focusing on the long term, you can ride out market fluctuations and make more informed investment decisions.

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Actively managed funds offer a range of investment options, including stocks, bonds, and money market instruments.

Investors can choose from a variety of actively managed funds, such as equity funds, debt funds, and hybrid funds.

These funds are designed to cater to different investment objectives, risk tolerance, and time horizons.

Real estate can be a savvy investment option, especially if you're looking for a category where active management can give you an edge. Over the past decade, 51% of actively managed real estate funds have survived and beaten their average passive peer.

In fact, this is the only category group whose 10-year success ratio exceeded 50%. This suggests that expert portfolio managers can make a real difference in your investment returns.

Actively managed real estate funds have continued to perform well, with a 66% one-year success rate that mirrors last year's figure. This solid performance is a testament to the expertise of these fund managers.

Some real estate funds invest exclusively outside the United States, while others take a more global approach. This can cause performance to ebb and flow between US and ex-US real estate securities.

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The Active/Passive Barometer is a helpful tool for investors to gauge the likelihood of success with active funds in different categories.

It's a great way to get a sense of the competition.

Direct investing can be a great option for those who want to take a more hands-on approach to their investments.

The Active/Passive Barometer can help you calibrate the odds of succeeding with active funds in different categories.

It's a useful resource for investors who want to make informed decisions.

Investors can use the barometer to pick the winners to buy.

By doing so, they can increase their chances of success.

The barometer helps investors navigate the complex world of active funds.

It provides a clear picture of the competition.

This can be a game-changer for investors who want to get ahead.

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Active management offers flexibility in the selection process, allowing fund managers to invest in a select group of stocks they believe are undervalued.

Investors in actively managed funds can benefit from the expertise and experience of the fund manager, such as in the case of an automotive industry fund.

The freedom to buy and sell allows active fund managers to offset losers with winners, providing benefits in tax management.

Some active funds are worth the premium in fees and expenses, especially in certain categories where long-term success rates are higher.

Here are some categories where active management stood out:

However, active US large-cap strategies generally have the lowest long-term success rates.

Passive funds have been attracting more inflows than active funds for the past nine years, according to Morningstar fund flow data.

This trend is reflected in the US market, where total assets in passive mutual funds and ETFs surpassed those in active ones for the first time in 2024.

The shift towards passive funds is largely driven by investors seeking cost-effective and broad market exposure.

In fact, active investing strategies often come with higher expenses for manager skills and involvement.

Passive long-term strategies are more established in the US, making up 74% of assets under management, compared to 26% outside of the US.

Here are some key statistics on the trend:

It's worth noting that some active funds are still worth considering, especially those in specific categories like real estate, bonds, and small-cap equity funds, which have generally higher long-term success rates.

Long-term success rates were generally higher among active real estate, bond, and small-cap equity funds.

In fact, these funds have consistently outperformed their passive counterparts in the long run. For example, active real estate funds have seen higher success rates than passive funds.

Active management involves making buy and sell decisions about the holdings in a portfolio, which can be a huge advantage in certain market conditions.

However, it's worth noting that active management often comes with higher expenses for manager skills and involvement.

Here are the categories where active management stood out and where it fell short:

Passive management, on the other hand, is a strategy that aims to equal the returns of an index, which can be a more cost-effective option.

Investors have been increasingly turning to passive funds in recent years, with passive funds attracting more inflows than active funds for the past nine years.

In fact, total assets in US passive mutual funds and ETFs surpassed those in active ones for the first time in 2024.

Fidelity Investments offers a range of services to support actively managed fund investors.

Fidelity has over 250 actively managed funds to choose from.

Their services include online trading, retirement accounts, and investment research tools.

Many of their funds have low minimum balance requirements, making it easier to get started.

Fidelity's research team provides in-depth analysis and recommendations to help investors make informed decisions.

Their platform is user-friendly and accessible 24/7, allowing investors to manage their accounts at their convenience.

A fresh viewpoint: Fidelity Managed Retirement 2025 Fund

Active management involves a professional investor or team making buy, hold, and sell decisions about a portfolio's assets.

The goal of any investment manager is to outperform a designated benchmark while managing risk, limiting tax consequences, or adhering to ESG standards.

Active managers may rely on investment analysis, research, and forecasts, including quantitative tools, and their own judgment and experience.

Their approach can be strictly algorithmic, entirely discretionary, or somewhere in between.

Passive management, also known as indexing, follows simple rules to track an index or benchmark by replicating it.

Studies comparing active and passive management have only served to keep the debate alive about the respective merits of either approach.

Actively managed funds offer professional expertise, allowing investors to benefit from a fund manager's know-how and experience in the market.

This can be reassuring for new investors who are still learning the ropes of trading, or those who have faith in a particular fund manager.

Actively managed funds also have the flexibility to outperform the market, seeking higher returns than index funds. Historically, however, the majority of active funds don't outperform the market.

The freedom in the selection process of actively managed funds allows managers to invest in a select group of undervalued stocks, giving them more control over the portfolio.

Actively managed funds also allow for benefits in tax management, enabling managers to offset losers with winners.

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Active trading can be riskier than index investing, since performance relies on the fund manager to make buying and sellings decisions.

Underperformance is a possibility with actively managed funds, as the fund manager's miscalculations or unforeseen events can deliver a blow to the market.

High management fees are associated with having a fund manager make decisions, which are typically higher than with passively managed index funds.

Actively managed funds have higher asset turnover, resulting in more capital gains tax events and increased tax liability.

Risk is inherent in actively managed funds, making them less suited for a long-term, buy-and-hold strategy.

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