An Actively Managed Mutual Fund Explained

An actively managed mutual fund is a type of investment where a professional fund manager actively selects and manages a portfolio of securities to meet specific investment objectives.

These funds are actively managed, which means the fund manager makes decisions about buying and selling securities to try to beat the market.

The goal of an actively managed mutual fund is to outperform a specific benchmark, such as the S&P 500 index.

The fund manager uses their expertise and research to identify undervalued or overlooked investment opportunities to add to the portfolio.

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A mutual fund is a type of investment vehicle that pools money from many investors to invest in a variety of assets.

Mutual funds are managed by professional investment managers who actively select and manage the investments to achieve the fund's objectives.

They offer a way for individuals to invest in a diversified portfolio of stocks, bonds, and other securities with a relatively small amount of money.

Mutual funds can be actively managed, meaning the investment manager actively selects and manages the investments, or passively managed, meaning the investments track a specific market index.

Investors can buy and sell mutual fund shares through a brokerage firm or directly through the fund's website.

Mutual funds can be invested in a variety of asset classes, including stocks, bonds, commodities, and real estate.

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There are several types of mutual funds to choose from, each with its own unique characteristics.

Index funds, for instance, track a specific market index, like the S&P 500, and aim to replicate its performance.

Actively managed mutual funds, on the other hand, have a portfolio manager who actively selects individual stocks and bonds to try and beat the market.

Sector funds focus on a specific industry or sector, such as technology or healthcare, and can be a good option for investors who want to put their money into a particular area.

Hybrid funds, also known as balanced funds, combine stocks and bonds in a single portfolio, offering a mix of growth and income potential.

Some mutual funds are also designed to track a specific investment strategy, such as a growth and income strategy, or a value investing strategy.

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Active vs Passive Investing is a fundamental concept in the world of mutual funds. Actively managed funds, like the one we're discussing, rely on the research and decisions of an investment manager or a team of managers to select the funds' holdings.

The performance of an actively managed fund is usually measured against a benchmark index that mirrors the fund's investment strategy. According to Example 3, this benchmark index can be a Sensex or Nifty, and the fund manager aims to beat the returns of the benchmark.

Actively managed funds have their pros and cons. One of the advantages is that they can outperform benchmark indexes over short and long terms, sometimes by a significant amount, as seen in Example 8. However, the majority of actively managed funds underperform their benchmark indices over time, as stated in Example 13.

Here's a comparison of actively and passively managed funds:

Actively managed funds have a dedicated fund manager who decides which stocks to include and exclude based on market performance and individual stock performance.

The fund manager is usually supported by a team of investment analysts, and their performance is measured against a benchmark index that mirrors the fund's investment strategy.

Performance over various periods, such as one, three, and five years, can be found in the fund prospectus, which also lists management fees and provides information on the fund managers.

The prospectus for the Fidelity Magellan Fund shows that its benchmark, the S&P 500, had returned almost 43% in the last one-year stretch and had an annual average return of slightly less than 19% over the past five years.

About 73% of actively managed U.S. large-capitalization equity funds have underperformed the S&P 500 over the past five years, according to S&P Indices vs. Active (SPIVA) research scorecards.

Actively managed funds can adapt quickly in changing markets, thanks to a team of over 170 global research analysts and portfolio managers.

The fund manager has the potential to outperform the market and maximize return, but past performance is no guarantee of future results.

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Active bond managers had a stellar 12-month run in June 2024, with roughly two out of every three beating their average passive counterpart.

In the intermediate core-bond category, a 72% success rate was achieved by active portfolios, which invest primarily in investment-grade US fixed-income debt with 2–10-year durations.

These active portfolios tend to sport shorter duration and take more credit risk than indexed peers, a combination that proved ideal amid higher-than-expected interest rates and narrowing credit spreads.

Active fixed-income funds often outperform passive funds in periods of rising interest rates, making them a viable option for investors seeking to capitalize on market trends.

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In the real estate category, actively managed funds have a remarkable track record. Over the decade through June 2024, 51% of actively managed real estate funds survived and beat their average passive peer.

Their success rate is impressive, with 66% of them beating their passive counterparts in the last year. This mirrors last year's figure, showing consistency in their performance.

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Some real estate funds invest exclusively outside the United States, while others are more global. This difference in investment strategy causes active managers' success rates to ebb and flow between US and ex-US real estate securities.

Actively managed real estate funds have proven to be a winning strategy, with a 10-year success ratio exceeding 50%.

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Active investing involves a fund manager who actively changes the fund's composition at their own discretion, whereas passive investing involves a fund manager who only copies the movement of the benchmark indices.

The strategy behind active investing is to beat the benchmark returns, but the reality is that most active funds underperform their benchmarks. In fact, according to S&P Indices vs. Active (SPIVA) research, about 73% of actively managed U.S. large-capitalization equity funds have underperformed the S&P 500 over the past five years.

Active investing comes with higher fees, with expense ratios ranging from 0.08 to 2.25% depending on equity or debt orientation. In contrast, passive investing has a maximum expense ratio of 1%.

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Here's a comparison of the two strategies:

Despite the higher fees, some actively managed funds have outperformed their benchmarks in the short term. However, this is not a guarantee of future results, and past performance is not an indicator of future success.

It's essential to conduct thorough research about the management team, fees, and costs associated with any portfolio when choosing active investing.

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A coin flip is essentially what it's been between actively managed mutual funds and their passive peers, with about 51% of active strategies beating the average passive fund in their Morningstar Category over the past year.

To assess fund activeness, you can look at metrics like tracking error and active share, but keep in mind that high numbers don't always guarantee superior performance. In fact, some active funds closely replicate the asset weightings of an index fund at a higher price point.

To evaluate active managers, consider factors such as their track record, process, and whether their parent firm aligns its interests with investors. Morningstar's research tools can help you discover features that differentiate a strategy from its peer group and benchmark.

Here are some key metrics to keep in mind when evaluating mutual fund performance:

Assessing Fund Performance is a crucial step in evaluating mutual fund performance. High tracking error and active share don't guarantee superior performance, but they do offer one way for active funds to justify their fees.

Some active funds closely replicate the asset weightings of an index fund, but at a higher price point. This means that even if a fund is actively managed, it may not necessarily outperform its cheaper passive alternatives.

To get a better understanding of a fund's performance, divide its active share or tracking error by its expense ratio and compare it to a custom benchmark or peer group. This gives you one indicator of the difference between an active fund and its cheaper passive alternatives.

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High tracking error and active share don't guarantee superior performance, but they do offer one way for active funds to justify their fees. Some active funds closely replicate the asset weightings of an index fund, but at a higher price point.

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To evaluate a portfolio manager's performance, consider factors such as the people managing the portfolio, their process, and whether the parent firm aligns its interests with investors.

With interactive research, portfolio managers can perform complex analyses faster than ever. This is especially useful when evaluating a manager's track record.

The Portfolio Manager Handbook shows a holistic picture of a portfolio manager's career, including strategies managed over time and how those strategies performed compared with peers during the manager's tenure.

Investors can also use the Investment Research Assistant to discover features that differentiate a strategy from its peer group and benchmark.

Fidelity has a history of demonstrating the effectiveness of active management, with over 170 global research analysts and portfolio managers working together to select investments with the potential to outperform.

To get a better sense of a portfolio manager's performance, divide a fund's active share or tracking error by its expense ratio and compare it to a custom benchmark or peer group.

Here are some resources to help you evaluate a portfolio manager's performance:

By considering these factors and using these resources, you can get a more complete picture of a portfolio manager's performance and make more informed investment decisions.

Choosing a mutual fund can be overwhelming, especially with so many options available. Fidelity has a history of successful active management, with over 70 years of demonstrating its effectiveness.

Their team of experts includes over 170 global research analysts and portfolio managers who can quickly adapt to changing markets. This expertise allows them to select investments with the potential to outperform the market.

A variety of funds are available, spanning the equity asset class and range of investment styles, including 53 active equity funds rated 4- or 5-stars by Morningstar. This means you have a choice of funds to suit your needs.

To evaluate a portfolio manager's track record, consider factors such as their people, process, and parent firm's alignment with investor interests. Fidelity's interactive research tools can help you make informed decisions.

Here are some resources to help you assess a portfolio manager's track record:

Investors use actively managed funds for specific sectors, such as biotech or real estate, and go with index funds for broader holdings like large-cap or international equities.

Research is key when choosing actively managed funds. Conduct thorough research about the management team, fees, and costs associated with any portfolio, its trading turnover, and its operations.

Some investors prefer index funds for their broad holdings, as they often have lower fees and provide consistent returns.

The Investment Company Institute reports that most underperform their benchmarks and charge more in fees.

It's essential to consider the fees and costs associated with any portfolio, as they can eat into your returns.

Here are some key considerations when evaluating actively managed funds:

Fidelity Mutual Funds have a long history of demonstrating the effectiveness of active management, with over 70 years of experience under their belt.

Their skilled portfolio managers, like Will, who has 34 years of tenure, delve into research from a team of global analysts to identify undervalued stocks and help produce better returns than those of index funds.

Fidelity offers a variety of funds spanning the equity asset class and range of investment styles, including 53 active equity funds rated 4- or 5-stars by Morningstar.

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The Morningstar Rating for funds, also known as the "star rating", is calculated for funds with at least a three-year history and takes into account variation in a fund's monthly excess performance, placing more emphasis on downward variations.

Meet Eddie, who is committed to finding opportunity in the health care sector, and is part of the team that manages the Fidelity Select Health Care Portfolio.

Fidelity's portfolio managers can adapt quickly in changing markets to select investments with the potential to outperform, thanks to the expertise of over 170 global research analysts.

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