How do I go about picking an active fund manager?

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I’m worried about being entirely invested in tracker funds. How should I choose a manager that picks stocks?
Matt

Paul Angell, AJ Bell Head of Investment Research, says:

Hi Matt, I suspect your concerns here boil down to being exposed to unnecessary risks in a passive only approach or missing out on opportunities in not having any actively managed funds, or both. Either way you’re considering diversifying your portfolio, by bringing together different funds or stocks to play different roles, which is a good thing.

The value of diversification

We think long and hard about diversification within our AJ Bell investments team, particularly at an asset allocation perspective. For example, are we blending diversified regions and asset classes that give our portfolios the best possible opportunity to perform from a risk and return perspective? Take regional diversification for example, if you were to invest in a global equity passive fund, you’ll find that one specific equity market, the US, makes up a massive part of the portfolio, with other regions less represented, if at all.

We’re very aware of this US market dominance in our AJ Bell funds, so seek to diversify away this risk, and add in more opportunities through our regional asset allocation. The table shows how our AJ Bell’s Global Growth fund compares to a fund tracking the global equity market (MSCI World) in terms of regional diversification.

Looking for active managers

The major appeal of active managers is an opportunity to beat the market. While there is a chance to achieve this, studies by AJ Bell have shown that, over a 10-year period, just 24% of active managers achieved this goal as of 2025.

So, how do you go about picking the right active managers? The five Ps are a good place to start: philosophy, process, people, performance and price.

Typically, the charges associated with an active fund are a bit higher than passive, so before purchasing, you’ll want to ensure that the price still seems reasonable. Remember those charges will eat into your returns each year.

Platforms are a good place to start in gauging a lot of this information, with fund manager websites able to provide more of the detail behind individual funds. You can read about the five Ps in detail a bit later.

There’s no guarantee that any of these factors ensures a fund’s future outperformance. But they do act as a useful framework to assess active funds.

There are thousands of funds to choose from, and of course running through the 5 Ps with every option is unlikely to be an efficient use of anyone’s time. For investors wanting a narrower set of options, we’ve established a favourite funds list, that highlights some of the funds that we think have a great chance of delivering their investment objectives over the long term.

The five Ps
Philosophy is about the market inefficiency the fund managers believe exists and how they intend to exploit this in their investment approach. Market inefficiency refers to something that a fund manager believes others have either over or underpriced. For example, perhaps they think the market undervalues companies that can quickly grow their revenue streams, or that the market undervalues ‘distressed’ stocks where they believe credible turnaround plans exist. A philosophy itself is no guarantee of success, but it does lay out the theory for active management in the fund. Understanding the philosophy can help you identify if you’re getting something unique by choosing an active manager.
Process goes hand in hand with philosophy, describing ‘how’ the managers exploit the perceived market inefficiency. This could include aspects such as who focuses on what in the management team, or the use of technology, for example a screening tool to weed out companies that don’t fit the fund’s profile.
People refers to the team that’s running the fund. This starts with the fund manager, but it also includes the team behind him or her. How long has the manager been running the fund? What was their background before this? How big is the team? How experienced are they?
The last two Ps, performance and price, are often the most significant deciding factors for investors. It’s important to remember when looking at performance, that what happened last year is no guarantee to this year’s returns. What can be more helpful is looking at a longer time period, such as three or five years, to see how the fund rides out different market conditions. Keep in mind what sort of fund you are choosing as well. If you are looking for a focus on value, the fund is unlikely to have kept up with an index that’s packed with growth companies over a period where the growth factor has outperformed, or vice versa.

When is it time to part ways with a manager?

Active funds often cycle through periods of outperformance and underperformance. Much of this waxing and waning is linked to whether an active manager’s investment philosophy or style has been in, or out, of favour.

Where possible it is therefore best to assess funds versus style-adjusted, rather than main, indices. Where a fund is consistently underperforming its broad investment style / opportunity set, say over two or three years, it’s a good indication that a fund has lost its sparkle and investors should seriously consider selling.

Otherwise the steps of revaluating a fund holding are very similar to how to select a fund in the first place. You can run through a checklist to better understand if the fund still operates to the same philosophy, if it still resonates with your investment needs, and if there have been significant changes in the team.

You can also consider fund performance and the price compared to similar products on the market. To help weigh all these up perhaps consider, if you didn’t already hold the fund, would you choose to purchase it now?

The markets can be fickle and difficult to master, so there’s no guarantee that even a fund which seems great will fare well in the future. However, following the 5 Ps should calm nerves that your investment is in safe hands, allowing investors to stay longer on the journey. After all, remember, its ‘time in’ not ‘timing’ the market that is typically an investor’s greatest friend.

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Paul Angell, AJ Bell Head of Investment Research, says:

The value of diversification

Looking for active managers

The five Ps

When is it time to part ways with a manager?

Paul Angell: Head of Investment Research