Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 609

How to choose a good fund manager

Active fund managers have been copping it in recent years. On the one hand, passive funds have attracted huge swathes of money by offering investors a low cost and convenient way to access markets. And on the other, the growth in private investment has lured investors with the potential for outperformance with lower volatility, albeit with high fees attached. With their relatively large fees and mediocre performance, active funds have been caught in the middle and it hasn’t been pretty.

The above chart captures the poor performance of active managers. In 2024, 56% of Australian equity funds underperformed. Over the past 15 years, it’s been 85%. Global equity funds have fared even worse.

Australian mid and small cap equities funds and Australian bond managers did better in 2024, though their numbers are less impressive over longer periods.

Given all this, why would the average investor bother with active funds? Here are three reasons:

  1. The tide may be about to turn for these funds. That’s because two of the key trends of the past decade - the crowding into mega caps and low market volatility – are possibly reversing, which could be a boon for active funds.
  2. Even without this, there are still a lot of good fund managers, especially in the mid and small cap stock space, who have a consistent track record of outperformance.
  3. Finding a good fund manager can make a big difference to a portfolio. The chart below shows a hypothetical example of what 3% outperformance from a fund can do in the long-term.


Source: Firstlinks, ChatGPT.

How to identify the best managers

So, how to identify active funds that will deliver for your portfolio? Here are the key traits that I look for:

1. A track record over +10 years

For me, a track record of outperformance is critical, and it needs to be judged over a long timeframe. The longer the better. Why? Because funds should be assessed over several business and market cycles.

For example, momentum and growth stocks have dominated over the past 10 years, while value stocks have lagged. Any momentum or growth fund that hasn’t outperformed in this environment has failed miserably. Conversely, any value-style fund that has managed to outperform has done a terrific job.

A longer track record allows for a more thorough assessment of a fund’s performance across different market environments.

2. Exceptional individuals/small team

In my experience, the best funds often have small teams. Larger teams can lead to there being “too many chefs in the kitchen.”

That doesn’t mean larger teams can’t work. Some mega global managers have mastered the art of teamwork and funds management.

In my experience though, they’re the exception to the rule.

3. An identifiable philosophy/process

Is a fund’s philosophy understandable? Has the philosophy and process been consistent over time?

A fund may have a great track record, but if I’m not comfortable with its philosophy and process, I generally walk away.

For example, I’ve never invested in well-known fund manager, Cooper Investors, because I’ve never understood their idea of finding ‘value latency’ in stocks to outperform over time.

I missed out by not investing with this exceptional manager, but I’m ok with that.

4. Manageable fund size

Size is the enemy of fund performance.

There are many stories of funds which perform well, win awards and get loads of media coverage, resulting in a surge of fund inflows, only for performance to then fade, with money quickly heading out the door.

Look up Neil Woodford in the UK or Bruce Berkowitz in the US. And there are plenty of Australian examples too.

That’s why I prefer to invest in funds that don’t get too big. Those that prioritise performance and clients over fees.

5. Low profile preferred

I prefer a low-profile fund over a high profile one. Part of the reason is that it can prevent fund size from becoming an issue. The bigger reason is that I like managers who focus on investing rather than marketing.

It’s why fund managers farming out back-office administration and marketing to the likes of Pinnacle and GSFM (both sponsors) makes sense for fund managers. The managers can get on with the job of investing money rather than worrying about the hundreds of other tasks needed to run a funds management firm.

This isn’t an exhaustive list, though I’ve neglected to mention one thing and that’s fees. That’s because I think good funds are worth paying up for.

How to spot red flags in funds

How can you avoid funds that end up being duds? Here are five red flags that I look out for:

1. Massive outperformance

If a fund shoots the lights out, it can be a red flag. The fund may have had a certain style that gained favour. Or they could have run a concentrated portfolio where huge gains came from a few stocks. Or they could have employed leverage to juice returns.

Think of “The Big Short” stars such as John Paulson and Michael Burry, who took huge bets shorting credit default swaps prior to the GFC, yet after those life-changing gains their track records since have been found wanting.

2. Changing of investment style/process

If a fund changes its investment style, philosophy, or process, it can be a big red flag. It can mean the fund is struggling and is trying to dig itself out of a hole. Unfortunately, that rarely works.

3. Big increase in funds under management

As mentioned above, a sudden, large influx of money into a fund can spell trouble for future performance.

4. Inappropriate benchmarking of returns

I used to see it more, but there have been Australian equity funds that benchmark their performance against the cash rate, rather than the ASX 200 or 300. If I see this from a fund, I steer well clear of it.

More often, I’ve seen funds switch the benchmarks that they measure their performance against. They may swap the ASX 200 for the ASX 300 or the ASX All Ordinaries index. That’s another red flag for me.

5. Lack of transparency on returns

I don’t like funds that only show ‘gross returns’ rather than ‘net returns’. Investors don’t pocket gross returns, they pocket net returns, and it should be disclosed as such.

Another red flag for me is funds that include their returns at a prior firm. For instance, a boutique firm may quote returns not only at the boutique but from when the same team worked at a larger firm prior to that. It’s a perfectly legal practice though I'm not a fan.

Let me know your views on active funds and whether I’ve missed any key points.

 

(Full disclosure: Firstlinks has a large group of sponsors, many of whom are fund managers. Also, our parent company, Morningstar, does fund manager ratings for a living, based around its five-pillar framework: process, performance, people, parent, and price (the ‘5’Ps’). Therefore, it’s a sensitive topic and I’m bound to get hate mail. The views expressed are mine alone and based on my time as a former fund manager, stockbroking research analyst, and now Firstlinks editor.)

 

James Gruber is Editor of Firstlinks.

 

45 Comments
John W
May 09, 2025

Forager's monthly report by first week of new month, packed to the rafters with disclosure and transparency...
performance - **Net of all fees and expenses

https://cdn.prod.website-files.com/663447df664a763a7e0fce2e/681abe000acfb40fcd162ec1_April%20Monthly%20Report%20FISF.pdf

https://cdn.prod.website-files.com/663447df664a763a7e0fce2e/681abde9608b8f6c0551f6f6_April%20Monthly%20Report%20FASF.pdf

John W
May 08, 2025

Forager has the attributes of preferred Fund Manager... and the performance to match...

https://www.foragerfunds.com/performance

James
May 06, 2025

Always a danger in thinking this time is different. I guess investment time frame is an important consideration but switching/adjusting to perhaps temporary perceived changes in the investment landscape is difficult and likely error prone. How often do we and the so called experts get it completely wrong!? Just like market timing, impossible to get right most of the time.

Warren Buffet has probably seen it all over his long investing career. A very successful active investor with great acumen, skill, luck and gut instinct. Oft quoted by fund managers seeking success by association, yet rarely emulated.

Some of his sage advice, that I'm sure still stands (i.e. I'm sure he doesn't recommend abandoning what he's long said and go invest in managed funds!):

- He strongly recommends low-cost index funds for the majority of investors, suggesting they offer a simple and effective way to achieve long-term investment success. He believes that most investors struggle to consistently outperform the market, making index funds a practical choice for building wealth.
- He famously instructed the trustees of his estate to invest 90% of his wife's inheritance in a low-cost S&P 500 index fund, demonstrating his personal conviction.
- Buffett's advice for the average investor is to invest in a low-cost index fund and hold it for the long term.
- He emphasizes the importance of choosing low-cost index funds, highlighting that these funds can deliver better returns due to lower fees.
- Buffett has stated that index funds can allow investors who are not experts to outperform most investment professionals!

Jeff O
May 05, 2025

And in my view - arguably the really big question - in a multi-asset well diversified portfolio - will active portfolio construction/asset allocation make up for the likelihood of selecting underperforming active asset managers/funds - in Australian, US etc globally - over the long term (10-15 years +)?

No
May 05, 2025

Hi James,

one thing you have not mentioned is the NTA discount of many LICs and REITs.

To explain you must first define what you mean by "performance". Do you mean fund entry/exit price plus dividends or do you mean NTA growth plus dividends - internal performance. The first depends on invester perceptions (and indirectly marketing and investor relations) and the second depends on actual performance of those responsible for investing capital. A third wrinkle is franking credits and investment turnover (by manager).

When I buy a LIC (or REIT) I consider it bought for a 10 year time horizon. In practice most LICs have events that shoten the actual holding time, e.g. windup, take over, change in investment team. So if I buy at say a 20 or 30% NTA discount then there is room for small underperformance of the investment team. I am not saying buy any LIC because a lot of them have investment teams that have proven themselves very poor investors. This is also a reason to bail out of long held managers when the investment teams makes silly mistakes.

The investment turnover by investment managers has an interesting effect on the perceived performance of LICs (and other investment companies). Those with low turnover (e.g. AFI and other older LICs) do not generate as many franking credits from capital gains and so pay lower dividends. This means their share price has a natural growth higher than the LICs that trade more often. Higher growth in capital means lower dividends even though total return between the two is similar. The advantage of the higher turnover managers is that they give more franking to investors, whereas the lower turnover companies save it up for future investors. What will happen if the goverment lowers tax rate on companies? The answer is that the capital gains tax payable with be at the new rate, therefore the franking credit disappears. In practice the government will (hopefully) give some notice to the companies concerned so they can rearrange there affairs to give their shareholder som benefit. You can see what happend back in about 2000 - the last time the goverment lowered company tax (lots of special dividends).

Anway, you can see I am in favour of investing in LICs and REITs over ETFs. However, you can sometimes find it difficult to find an appropriate LIC for what you would like to invest in so I do invest in ETFs. For example, 15 or so years ago there were no LICs trading at a large discount that invested in Australian shares so I invested in VAS. Today, there are no LICs that invest in high quality credit (AAA) and no LICs that invest in high quality mining/drilling companies (BHP, RIO, Woodside, etc) so ETFs are the only choice. (personal evaluation of course)

Anyway, I think you may be refering to unlisted managed funds so the above may be of low relevance. Personally, I prefer the enforced transparency of listed funds as I cannot find enough independant information for unlisted funds. After seeing how listed funds cherry pick and exagerate their performance even though the historic data is published by the ASX I find it hard to beleive most unlisted managers.

Thanks for writing on this subject, there is very little considered work published.

James Gruber
May 05, 2025

Hi No,

Yes, this article referenced unlisted managed funds rather than LICs.

Much of what you say about LICs and buying them at discounts makes sense, as does your points about some of the limitations on ETFs.

Thanks,
James

Steve
May 04, 2025

One thing is true. This time (in history) is different. Not the here and now, but the use of technology. Index funds are just a small number of the available ETF's, there are many newer ones which use the same sort of research that active managers use for differentiation. Examples include the use of quality screening, equal weighting etc. So the bog standard cap weighted index is not the only game in town for the users of ETF's. Ok the hype may be a bit overdone, but as good AI comes into play more and identifies other factors that either increase performance, or at the least, remove duds it will be even harder for active managers. The last bit is even if you do find one (in advance) who is good, would you put 100% of your funds with them? Probably not (no advisor who wants to keep their accreditation would suggest that). So now you need to identify not one but say five outperforming managers. The odds of that get exponentially slimmer the more you add, and the underperformers will just drag down the over-achievers. The only possible winners might be micro and small caps where the information is much less voluminous, and if you have a particular insight into a specific industry. Then you have the key person risk all over again.

James Gruber
May 04, 2025

Steve,

You make good points. I'm just probably not quite as negative on active funds as you are.

James

Allan Abrahams
May 04, 2025

Dear James,
I'm a retired financial planner.
As you and I know, there are around 7 major investment processes, from Value v growth, top-down v bottom - up, Thematic, index funds etc. with a number of sub-sections like smaller companies, Australian v International.

In my opinion, trying to pick which investment structure to be in, requires a timing issue that I was never sure if anyone got the timing right for getting into one investment arena and the right time to get out.

I took the view like you that I looked at what and where the fund manager invested but more importantly, whether the guy running the fund and his analysts were similarly invested in the fund like our clients.
I was convinced of two things.
First off, no fund manager got it right 100.0% of the time.
My favourite questions over 40 years were,
1. Tell me what you got things wrong?
2. Tell me what you learnt from it?
3. And would you do it again?

In over 40 years in the profession, not one fund manager ever failed to answer those questions honestly!
Secondly, I was convinced that fund managers with "skin in the game" didn't want to lose their money any more than my clients or myself.

I have never been a fan of indexed funds.

I think you get what the market gives you,....at a low cost.
It reminds me of someone in a car with their foot on the accelerated going uphill but when going downhill, you find, the car has no brakes!
Unfortunately, many active managers mirror the performance of indexed funds, albeit at a larger cost which makes low fee index funds appear to be an attractive proposition.

I also agree that fund size is a problem, and large funds find it difficult to change direction without effecting the market value of their investments.
And the obvious point that I used to make is; it was like waterskiing behind the QE2.
By the time you changed direction, you either drowned or was eaten by sharks.
Not a desirable outcome, either way.



James Gruber
May 04, 2025

Allan,

A different perspective, thanks.

Steve
May 04, 2025

Giving honest answers is good to hear, but the data says most of these managers still didn't outperform. There is a problem about forecasting, its particularly difficult with the future. An issue is skewness, where just a handful of companies make the vast bulk of the returns in the sharemarket. There are many dud companies, some who were good but fell off the perch (eg Kodak) and others that just struggle through every day. Now the problem with skewness is the handful of companies that deliver the goods are often not known in advance, and if you don't hold positions in them, you underperform the index. However the index, by definition holds each and every winner, who do enough to make up for the losers with some profit. That is why the index is hard to beat - when its obvious who the winners are the index has already got a head start on you.

bs
May 04, 2025

What about in the case of specifically wanting an ethical alignment with one's investments (and i mean through a transparent process, not just through label/branding)? The options for low cost etfs are limited in this space, forcing investors towards active fund managers/SMAs, in order for some diversification.

Whilst paying for their advocacy is ok by me, and good returns are sought (though it's hard to get the right benchmark to measure against), it's difficult to find good options. Performing funds without fees that are so high.
Any tips or thoughts in these areas?
And, is anyone aware if whether some of the longer term better performing funds noted in the comments above have ethical tints?

JohnW
May 04, 2025

'ethical' what an interesting word - people with needs and wants are dependent on most businesses or services in some direct or indirect way...
hence... earning an income with money and return on investment off the pain and suffering of others - Health Industry is one such example... something to ponder...

Reg
May 04, 2025

Little different but would you consider Soul Patts an active fund manager to choose from?

James Gruber
May 04, 2025

Reg,

It is to a degree, albeit with a different structure. I would call it an investment company, in the mold of Berkshire Hathaway.

Kevin
May 03, 2025

I think Neil Woodford thought he was the lead guitarist in the band and set out on his own.Apparently it was the rhythm section ( bass and drums ) doing all of the work and he eventually cost people a lot of money.Another one that may be doing that ,probably best not to name him,has stumbled in the last 5 years.He has the yacht and the tropical island hideaway,he stumbled after 9 years or so.Finding info on him is difficult now,but I may be looking in the wrong place.

Peter Thornhill might know of Scottish mortgage trust (SMT) as he likes City of London.They stumbled in the last 5 years but seem to be coming back and have a good 20 year record. I prefer to do my own thing,happy to be the rhythm section and let the people on lead pull all the faces and grimaces.

As you say SPIVA give ~ 85% underperform and ~15 % do reasonably,I think they give info on 8 or 9 countries .Most of the time I forget to look at that ( as in 99% of the time).Something jogs the memory and I remember to look

Emma Davidson
May 02, 2025

Thanks for the article James. Here is an example of a fund that has consistently stayed on top for >10 years and why we should always combine passive investing with excellent active fund management:

Australian Shares 1
Annualised Return: 9%
Volatility: 14%
Sharpe Ratio: 0.49

US Shares 2
Annualised Return: 16%
Volatility: 13%
Sharpe Ratio: 1.08

Global Shares 3
Annualised Return: 13%
Volatility: 11%
Sharpe Ratio: 1.00

Global Value Fund (ASX: GVF) 4
Annualised Return: 11%
Volatility: 7.6%
Sharpe Ratio: 1.22

Unless otherwise stated, data sourced from Bloomberg LP, Staude Capital Limited and Company reports and all data as of 31st March 2025.
1Australian shares refers to the iShares Core S&P/ASX 200 ETF gross return in AUD with management fees of 0.05%
2 US shares refers to the iShares S&P 500 ETF gross return in AUD with management fees of 0.04%
3 Global shares refers to the iShares MSCI ACWI ETF gross return in AUD with management fees of 0.32%
4 All data presented on GVF is after taxes paid, expenses, management fees, dividends paid and the impact of dilution from exercised company options


michael
May 02, 2025

Taking a punt on a fund manager is similar to taking a punt on a company. But companies have more info available, & are subject to more detailed reporting rules.
It comes down to trusting a manager, in either case, and it is hard to get info on this.
Diversification is not a reason either, as most funds, apart from ETF, require $20K or more to start.

Jack
May 01, 2025

Eley Griffiths have been very good for a long time.

John Woodhead
May 01, 2025

Forager Managed Funds is an excellent example of first choice with a track record of 15 years.
Having exceptional transparency with mostly updates and quarterly webinars and annual roadshow - all abut connectedness with the unit holders - all 2,000...
More so, run a lean business with low analyst ratio - Australian 3 analysts, International 4 analysts.
All adhering to a discipline regime of stock selection and investment processes that often takes weeks to months before executing the final buy process.
Finally, all analysts are heavily and some fully invested in the Funds under Management, directly aligned to the unit-holders.
Truely, one of a kind fund manager!

James Gruber
May 01, 2025

Agree.

Dauf
May 02, 2025

I invest with them and the Aussie funds has done well but the international has typically been below its benchmark…hopefully it improves

James Gruber
May 04, 2025

Dauf,

Personally, I think the international fund has done relatively well given its value focus.

James

DINSHAW KATRAK
May 01, 2025

I would like to add one more disadvantage of using active managers. That is the tax payable by the investor. The manager is not interested in after tax performance being solely judged (and remunerated) on pre tax returns. So they happily churn portfolios. your end of year tax statement shows the shocks. A lot of short term undiscounted capital gains.


A low churn passive fund gives a much better tax outcome. 

Warren Bird
May 03, 2025

I have a different view on that.

Being "active" doesn't mean the manager does a lot of churning of the portfolio. That observation confuses active management with trading. Some active managers do a lot of trading, but that depends on their process.

Active really just means that they invest in a portfolio that doesn't align with their benchmark - e.g. the ASX All Ords, ASX300 or ASX200. Most active managers set a portfolio which is overweight to some stocks and underweight to others, then hold those relative positions for considerable periods of time.

Which means that there aren't lot of realised gains or losses in the distributable income they pay.

Furthermore, if you believe active management can add value - even if it's a trading style of investment process - then surely the capital value changes that are sold out will mostly be realising gains, not losses. In that case, so what if that results in the need to pay some tax - you are still going to be ahead of the passive return.

So this point isn't ''one more disadvantage" of using active managers at all.

My 2 cents worth on good active Australian equity managers. I've been investing with Ausbil (Paul Xirades and team) for many years now. They generate around 2.5% pa better than the market return over the medium term to long term very consistently, without ever being too far below benchmark when things go against them.

John
May 04, 2025

What’s “ the market return” ?

Dudley
May 04, 2025

Ausbil Active Dividend Income Fund
https://digital.feprecisionplus.com/documents/ausbil-fc/en-au/PLJ2/FS

Excess Return Since inception July 2018 -0.02%. Negative over past 5 years.

'Ausbil to launch Active Dividend Income ETF in 2025
Ausbil Investment Management (Ausbil) is pleased to announce plans to introduce its first exchange-
traded Fund (ETF) for its Active Dividend Income strategy in the first half of 2025.' (Not yet)

Warren Bird
May 05, 2025

Dudley, the objective of that fund is expressed in relation to tax effective income, not outperforming on a total return basis. Being 2 basis points from index return is in line with that.

The fund I invest in has done exactly what I said in my comment. If you think your selective data choice contradicts me then you need to think again.

Dudley
May 05, 2025

"The fund I invest in": fund not mentioned, so I looked for what might be popular.

Warren Bird
May 05, 2025

John, 'the market return' is the benchmark for the fund, so the ASX 200 or 300 or All Ords usually.

Dudley - really? Thought you'd be more meticulous than that and choose perhaps the first fund that comes up on their own website, the one with the actual long term track record (back to 1997) and the greatest amount of funds invested in it ($1.8 bn), rather than one that's well down the list and only launched a few years ago. Had you done that you'd have thought twice before attempting to contradict me and naysay my comment.

Dudley
May 05, 2025

"the one with the actual long term track record (back to 1997) and the greatest amount of funds invested in it ($1.8 bn)":

Ta, that uniquely identifies the one you were 'crowing' about:

"They generate around 2.5% pa better than the market return over the medium term to long term very consistently, without ever being too far below benchmark when things go against them.":

https://www.ausbil.com.au/products/australian-equities/ausbil-australian-active-equity-fund
Inception Date: 31/07/1997
Entry Price: $4.1654 (as at 01/05/2025)
Exit Price: $4.1488 (as at 01/05/2025)
Currency: AUD
Fund Size: A$1,798,452,789.89 (as of 31/03/2025)
APIR Code: AAP0103AU
Bloomberg: AUSITAA AU Equity
mFund: AXW01

https://www.ausbil.com.au/CMSPages/GetFile.aspx?guid=2c23cc11-50cd-410c-a93b-c701ce54752c
Performance since inception pa Date: July 1997 1.62%.

Skill or luck:
1. How to tell from the fund unit price series compared to the Benchmark S&P/ASX 300 Accumulation Index 'price' series?
2. How to tell from the past if similar performance will persist?
3. Is the risk of adding an intermediary worth it?
Many ask, none(?) definitively answer.

Mark Hayden
May 01, 2025

Thanks James, that is an excellent article. It addresses the second of the two step process.
1. Can any specific manager beat the market - yes, because:
a) some businesses are better than others (eg a better Industry or having better Management)
b) it is possible to predict some of these businesses.
2. Can we find such Managers - your points are good; but I would highlight that the main focus is their philosophy and their skills at analysing businesses (stocks).

Burrow Smorgasboard
May 01, 2025

Hi James, do you have some examples of consistent outperformers in the ASX space?

James Gruber
May 02, 2025

Hi Burrow,

Off the top of my mind and not an exhaustive list - Auscap, Hyperion, Greencape, Mirrabooka, Glenmore, Sandon, Spheria, 1851, First Sentier, Fidelity, Airlie, WAM select funds.

I've missed out many and these aren't recommendations - DYOR.

James

Paul R
May 01, 2025

I'd add Allan Gray, Smallco, Level 18.

Burrow Smorgasboard
May 01, 2025

I think I'll buy some more Pinnacle :)

Burrow Smorgasboard
May 01, 2025

"... if you think you have the skill to identify a good active manager that will perform AFTER you invest..." then why not identify good companies and invest directly (with zero fees) instead?

sandgroper
May 02, 2025

Because they are very different skillsets.

Chris Brycki
May 01, 2025

Hi James,

As someone who came from the active world but now runs a fully indexed investment business (Stockspot), I wanted to directly respond to the three points you raised about why investors should bother with active funds.

1. The tide might be turning

This is a familiar narrative. Whenever markets get volatile, active managers start talking about how it’s a “stock picker’s market” again. They’ll say dispersion is rising, index composition is shifting, and opportunities are everywhere.

It always sounds compelling. But there’s never much data behind it.

In reality, very few active managers have outperformed during market stress. Not during the tech wreck, the GFC, the COVID crash, or in the recent rate-hiking cycle. Jason Zweig summed it up well back in 2017:
https://jasonzweig.com/sorry-stock-pickers-history-shows-you-underperform-in-bad-markets-too/

In Australia, it’s the same story. Last year I looked at 349 of the largest active funds and found just 9.5% outperformed their benchmark over five years after fees. That includes the COVID period.
https://blog.stockspot.com.au/best-managed-funds/

S&P’s SPIVA data shows it gets even worse over longer periods. In early 2020, when markets dropped over 30%, most active funds had bigger drawdowns than their benchmarks.

This happens because active managers give up diversification in the hope of higher returns. That added concentration leads to greater risk. S&P calls this the “active manager’s conundrum”. The conditions active managers want — low volatility, high dispersion, and high correlations — only occur together about 2% of the time.
https://www.spglobal.com/spdji/en/documents/research/research-the-active-managers-conundrum.pdf

This is why I believe the long-term shift towards indexing will continue for decades. It’s hard to see active funds turning the tide while fees stay high and the data keeps showing consistent underperformance. Maybe once passive reaches 80% of total assets, the structure of the market will shift enough to give active a better shot. But we’re not there yet. Not even close.

2. There are still a lot of good fund managers

It’s true that there are some very talented people in active funds. But performance data shows that even the best ones rarely stay on top.

The SPIVA persistence report makes that clear. Out of 329 Australian Equity General funds, 96 beat the index in 2021. Only 4 of those continued to outperform every year through to the end of 2023. That’s about 2%. The numbers are only slightly better in the mid and small cap space.
https://www.spglobal.com/spdji/en/documents/spiva/persistence-scorecard-australia-year-end-2023.pdf

3. Finding a good manager can make a big difference

In theory, yes. But in practice, identifying that manager before they outperform is close to impossible. And even if you do, they often don't keep it up. Active managers are much more likely to underperform by around 3% each year after costs, fees, taxes and franking leakage.

A lot of big-name fund managers in Australia built reputations on a few good years, then struggled to sustain it. Platinum, Magellan, Perpetual — all strong performers at different points. But asset gathering success often becomes a burden. Once a manager has billions under management, incentives change. Motivation shifts. Performance drops.

At the end of the day, it’s not just about finding a great manager. It’s about being able to stick with them before they’re proven, and long after the headlines fade.

James Gruber
May 02, 2025

Hi Chris,

Thanks for the feedback. I am a fan of passive investing, though also see a spot for active funds in portfolios too.

Regarding your specific points:

1. Today is different from past history and we'll see what happens. It's nothing like the GFC or Covid. I think using history as prologue is dangerous. However, the setup to me looks a little like 2000, and then, there were many value fund managers who significantly outperformed indices. Many of the growth mold got creamed, but others did remarkably well ourt of the wreckage.

Assuming passive funds will float through future market disturbances seems a little presumptuous too. The passive model will be stress tested at some point too.

2. That's a short time frame and I personally know a lot more than 4 Aussie fund managers that have consistently beaten the ASX over the long term.

3. As I said, size is the enemy of performance. Look at the great Berkshire Hathaway for evidence of that.

James

Ronald
May 02, 2025

As a BRK shareholder, I had a Quick Look and see that BRK has outperformed SPY over 1, 3, 5, 10 years. Am I missing something?

James Gruber
May 02, 2025

Ronald,

Yes, Buffett has performed well, though he performed a lot better early in his career, in the 60s, when he managed less money. His hedge fund outperformed the Dow by 23% per annum over the 11 years it ran!

Retired Early with Active Funds
May 02, 2025

As James has mentioned, SIZE is the major factor in outperformance. Size of the FUM impacts performance.

Fund managers at large funds are index huggers - they don't want to rock the boat too much so they can get another job with another company. The high achievers in such funds would leave these large equity funds to start their own boutique funds. Hence, what you have left in the large funds community are average managers in rotating chairs, and that is also why small and mid cap funds is where one can find outperformance.

Therefore, one can quote SP Global reports about 98% of large equity funds do not beat the index over longer term, but understanding the industry and how it operates would be better than just looking at "data".

Ken
May 06, 2025

James, your comments about the tide may be turning aren't just suppositions. Even Vanguard just wrote a piece for advisors saying that by not owning the top 10 stocks in the US last year, it was the biggest drag on US active fund performance since records began in 1991. And the past decade has seen continued substantial drag on active fund performance from increasing concentration of US indices.

Even Vanguard, the pioneer in index investing, expects active funds to start performing better vs indices!

Sandgroper
May 01, 2025

Thanks James, biggest point is - if you think you have the skill to identify a good active manager that will outperform AFTER you invest then do it - it can make a very big difference. AND be willing to understand that skill only reliably overcomes luck over a long period (so don’t expect outperformance every year). But if you don’t have that skill - don’t, go and buy cheap index funds.

 

Leave a Comment:

RELATED ARTICLES

Why good active managers should outperform

The numbers tell the story for index investing

Why an active fund should not perform like its benchmark

banner

Most viewed in recent weeks

Pros and cons of Labor's home batteries scheme

Labor has announced a $2.3 billion Cheaper Home Batteries Program, aimed at slashing the cost of home batteries. The goal is to turbocharge battery uptake, though practical difficulties may prevent that happening.

Howard Marks: the investing game has changed

The famed investor says the rapid switch from globalisation to trade wars is the biggest upheaval in the investing environment since World War Two. And a new world requires a different investment approach.

Welcome to Firstlinks Edition 606 with weekend update

The boss of Australia’s fourth largest super fund by assets, UniSuper’s John Pearce, says Trump has declared an economic war and he’ll be reducing his US stock exposure over time. Should you follow suit?

  • 10 April 2025

4 ways to take advantage of the market turmoil

Every crisis throws up opportunities. Here are ideas to capitalise on this one, including ‘overbalancing’ your portfolio in stocks, buying heavily discounted LICs, and cherry picking bombed out sectors like oil and gas.

An enlightened dividend path

While many chase high yields, true investment power lies in companies that steadily grow dividends. This strategy, rooted in patience and discipline, quietly compounds wealth and anchors investors through market turbulence.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

Latest Updates

Investment strategies

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Investment strategies

Does dividend investing make sense?

Dividend investing offers steady income and behavioral benefits, but its effectiveness depends on goals, market conditions, and fundamentals - especially in retirement, where it may limit full use of savings.

Economics

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

Strategy

Ageing in spurts

Fascinating initial studies suggest that while we age continuously in years, our bodies age, not at a uniform rate, but in spurts at around ages 44 and 60.

Interviews

Platinum's new international funds boss shifts gears

Portfolio Manager Ted Alexander outlines the changes that he's made to Platinum's International Fund portfolio since taking charge in March, while staying true to its contrarian, value-focused roots.

Investment strategies

Four ways to capitalise on a forgotten investing megatrend

The Trump administration has not killed the multi-decade investment opportunity in decarbonisation. These four industries in particular face a step-change in demand and could reward long-term investors.

Strategy

How the election polls got it so wrong

The recent federal election outcome has puzzled many, with Labor's significant win despite a modest primary vote share. Preference flows played a crucial role, highlighting the complexity of forecasting electoral results.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.