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The number that justifies — or destroys — the case for active management.
Active return is the portion of a portfolio's return that comes from active management decisions — calculated as portfolio return minus benchmark return over the same period. Positive active return means the manager beat the index; negative means you would have been better off in a low-cost index fund. Persistent negative active return is the strongest argument for indexing.
Active Return = Rp − RbActive Return = Rp − RbPick a benchmark, compute its return over the same window as your portfolio, subtract. The interesting question is choosing the right benchmark.
Active return is unforgiving. If you cannot beat the appropriate index, you should buy it. The right benchmark is the one that matches your risk profile — using S&P 500 to evaluate a small-cap value strategy is unfair to both sides. A small-cap value strategy should be measured against a small-cap value index.
Over 15+ year windows, roughly 85% of active US large-cap funds underperform the S&P 500 net of fees. That is the SPIVA scoreboard. Active management does add value in some niches (small-cap, emerging markets, distressed credit) but the average actively managed fund destroys value vs. its proper benchmark.
Your portfolio returned 14.8% over a 12-month window. The S&P 500 total return over the same window was 13.1%.
Active return = 14.8% − 13.1% = +1.7%
Whether that 170 bps is real skill or noise depends on your tracking error and sample size. See Information Ratio for the proper risk-adjusted version.
Active equity managers who survive 10+ years typically run 0 to +2% active return after fees. Anything sustained above +3% over a decade is exceptional — only a handful of public mutual funds have done it.
Alpha (Jensen's) · Information Ratio · Tracking Error · Batting Average
Active return is the raw difference vs. benchmark. Alpha (Jensen's) is the part of that difference that is not explained by beta exposure to the market.
For an actively managed equity portfolio, sustained +1% to +2% after fees over a decade is good. +3% is exceptional.
Match the asset class and style: large-cap US equities → S&P 500; total US market → CRSP US Total Market; small-cap value → Russell 2000 Value; global ex-US → MSCI EAFE.
Sample size. Active return needs years to be statistically meaningful. The Information Ratio normalizes for this — it tells you whether the active return is signal or noise.
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