When to Call In a Professional
Kiplinger's Personal Finance|January 2022
For some investment categories, choosing an actively managed fund makes sense.
Adam Shell

IT’S HARD TO BEAT THE MARKET AND THE index funds that track them. The numbers don’t lie: Only one-fourth of all actively managed funds in the U.S. topped the average of their index fund counterparts over the 10-year period that ended in June, according to the latest Active/Passive Barometer report by Morningstar.

But in certain pockets of the market, active managers do a better job of beating their benchmarks. Studies show that active funds that invest in small and midsize companies, foreign shares and intermediate-term bonds, for instance, have had more success beating their benchmarks than funds in other market segments, according to Morningstar. “Areas of the market that are less picked over are more target-rich for active fund managers,” says Ben Johnson, director of global ETF research at Morningstar. Why’s that? “There’s less opportunity if you’re coming up with the 12 millionth investment thesis for Apple.”

Indeed, it can be difficult for active managers to stand out in highly trafficked market corners, such as large-company stocks. Most of these firms are as closely followed as your favorite sports team or Netflix TV series. More than 50 analysts track Amazon.com’s every move, for example. That goes some way to explain why only 17% of all U.S. large-company funds outpaced the S&P 500 over the 10-year period ending in June, according to data from S&P Dow Jones Indices.

Herewith, a guide to where it pays to go active and some funds to consider. The best portfolios will use index funds for heavily trampled parts of the market and put active funds to work for those asset classes in which an active manager has a better shot of beating the index. “A blend of the two is a good way to go,” says Steve Azoury, a chartered financial consultant and founder of Azoury Financial. (Unless otherwise noted, returns and data are through November 5.)

Flying under the radar.

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