Actively managed fund

In an actively managed fund, a manager or team decides what to buy, what to sell and when, within the limits set by the fund’s objective. They may pick individual companies they believe are undervalued, shift between sectors or countries, or hold cash when markets look expensive. Each fund is measured against a benchmark, usually an index covering the same market. Paying for analysts, research and more frequent trading makes active funds more expensive than index funds, through a higher ongoing charge and higher transaction costs inside the fund.

The case for active management is that skilled managers can beat the market, or at least limit losses in downturns. The difficulty is that active managers as a group largely hold the market, so after their higher costs most of them trail their benchmarks over long periods, and past winners rarely stay on top. Some areas, such as smaller companies or less efficient markets, are often argued to give more room for skill. Choosing an active fund is a bet both on the manager’s skill and on your ability to identify it in advance.