Actively managed funds aim to outperform the market averages. Through "active management," they seek to hold assets that yield above-average returns in the short term, thereby beating the market, specifically exceeding the performance of indices such as the S&P 500.
It is important to remember that active management comes at a higher cost, which also increases the risk of underperformance.
Conversely, passively managed funds strive merely to match market performance while minimizing risks and management costs.
Interestingly, the majority of actively managed funds have failed to surpass their respective indices. According to a study by Standard and Poors, by the end of 2019, over a ten-year period:
Less than 11% of U.S. funds managed to outperform their respective indices;
Less than 23% of international funds managed to outperform their respective indices.
Here, we see that some actively managed funds have, indeed, been successful. So why not invest in them? The same S&P study indicates that of the funds that performed well during the five-year period from 2010 to 2014, only 31% remained at the top in the following five years. This implies that basing investments on past success or randomly selecting a fund yields roughly the same odds of winning—or losing.
