Their asset allocation strategy and stocks picked are close to their chosen benchmarks. They then value-add by overweighting or underweighting stocks that they feel would help the fund outperform.
Investors who question the existence of fund managers, who consistently underperform their benchmark, have been advised to invest via index funds instead as they charge lower on management fees.
There are also managers who vary quite significantly from their benchmark. With a larger tracking error, they can outperform it by quite a wide margin especially in volatile times.
However, when a broad based market heads south significantly, a fund that is benchmarked, like the S&P 500, will usually find it difficult to avoid losses.
- Firstly, this is because the fund is mandated to stay invested in stock under the index.
- Secondly, the fund manager cannot stay invested in only a few profitable stocks, as they typically do not invest more than 5 percent of their portfolio in a stock or a group of related companies.
