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That’s some pricey research!

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Given some form of benchmark, an active fund is one that is directed by a manager whose asset selection and trading decisions aim to outperform the benchmark.

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The idea is that better trading, better methodology, deeper analysis, some applicable expertise, knowing when to act (or developing a system that does) or not, and/or doing superior risk management will beat the benchmark. And the argument is that these extra efforts will justify a higher fee because they will outpace it (recall our essay on fees).

Bells and whistles

An example of an active fund would be a small-cap value fund that aims to trade smartly, applying a quantitative factor system and other bells and whistles and so on… Additionally, it has a well defined benchmark and trades only assets within that same pool and mandate.

When discussing fund ranking, the benchmark itself isn't our focal point. Instead, our attention turns to the passive funds that shadow this benchmark. These passive funds are essentially cost-effective tradable versions of the index. The ultimate goal for the active fund? To outperform these passive counterparts.

We track the Smartypants 50 Index

We have to be careful because some funds are much more “active” than others. Also a fund that tracks some “index” will change as the underlying index they attempt to track changes. There are many indices out there, so if the index is somewhat active, what is a fund that just aims to passively track it? It may be some index that e.g. leaves out assets (an ESG version of a major index), an equal or other re-weighting of a major index, or something far more elaborate. Different degrees of “active” but active nonetheless. With many established indices already being very efficiently tracked by very low or no fee funds, almost all new funds being created are active in some way.

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Active, not so active, pretenders and imposters

DAYOSS will assess if the fund did better than benchmark, based on risk, reward and if justified its fee. The data driven approach of DAYOSS cares less about the reported degree of "activity" of a fund, and more about whether whatever the "activity" it uses as it aims to outperform its benchmark did deliver.

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So a fund that claims to be active but is behaving like a passive fund just with higher fees will be scored lower than the equivalent passive fund.

But funds whose activity generated a risk and reward profile that is more in line with your preferences than the equivalent passive fund will get scored higher. This will all depend on your preferences regarding risk, reward, recency and more.

More so, DAYOSS will also automatically detect when a fund is behaving differently to its proclaimed label, e.g. a blend fund behaving more like a value fund. It will handle it accordingly, especially in peer comparisons, so you don’t have to spend the time and can rest assured funds will be correctly analyzed.