Is the gourmet price worth it? Active equity funds should increase the active share and follow a systematic, disciplined portfolio construction methodology.

On average, active equity funds do not fulfil expectations of delivering  higher returns than their market cap benchmark. This is strong empirical evidence in favour of passive replicating funds. But let’s look closer at the active equity funds.

One place to start is the active share[1] of the portfolio holdings — in other words, the percentage of the portfolio that differs from the benchmark. As a matter of fact, many so-called active funds are not that active.  The low active share is driven by the desire to keep tracking error low, i.e. avoid deviating too far from the benchmark performance, which for an active fund sounds like a contradiction. Yet retail investors are typically charged 1.3% – 1.5% p.a., for an active fund/ETF [2], while the fees of a benchmark replicating fund/ETF are in the region of 0.1% to 0.5%.

The combination of a low active share and high costs make it almost impossible to generate a performance that is better than the benchmark. The table below summarises the required outperformance at different levels of active share to simply cover the fund costs, approximated by the TER (Total Expense Ratio). For example, with an active share of 50%, the fund manager must generate an annual outperformance of 2.6% on the active share of the portfolio in order to cover a TER of 1.3% per annum.

Publications on the performance of passive vs active funds ultimately highlight that investors pay too much for strategies that are designed to stay close to the benchmark. From this perspective, the invitation to invest in low-cost funds and ETFs that replicate market cap indices is entirely legitimate.

Let’s add another relevant aspect. A high active share is a necessary but not sufficient condition of being rewarded for the high cost paid. Particularly for higher TER level, the minimum outperformance is not so obvious to achieve over a prolonged period. It requires a sound rationale, as well as systematic and discipline in the portfolio selection.

For example, in the case of active funds based on a factor investing strategy, it is relevant how the portfolio selection reflects the factor that it intends to replicate. A recent study[3] run on US based funds/ETF finds on average no value added out of the entire sample of active, factor based funds/ETF. However, they find a significant performance improvement for factor funds whose holding over time more closely resemble the theoretical portfolio replicating the specific factor. In other words, to effectively capture factor premia, the portfolio construction process must be systematic and disciplined.

At QuantArea, we offer active equity investment solutions with costs comparable to passive funds. More importantly, our strategies are based on a sound theoretical rationale and solid empirical evidence. The portfolio construction is systematic and disciplined, selecting stocks based on detailed assessment of their fundamentals.

Our proprietary optimisation approach addresses risk at different levels and can support a higher active share (thereby increasing the probability of achieving outperformance) within a well‑controlled tracking error budget.

The result is a persistent added value and improvement compared with passive index-replicating funds/ETFs. Investors must be offered real added value for the fees they pay. In most cases, they pay a lot for what they are served.

February 24^th,  2026
Carmine Orlacchio, CIO

[1] Cremers K. M., Petajisto A., How Active Is Your Fund Manager? A New Measure That Predicts Performance, 2009, Review of Financial Studies

[2] This topic is under the loop of the European Parliament https://www.esma.europa.eu/press-news/esma-news/esma-updates-supervisory-work-closet-indexing. In the UK, a group of fund management companies were fined in 2019 for unfair practices, namely marketing funds as active and charging higher fees for essentially passive replication. Similar cases are currently being investigated in Canada.

[3] Cremers K. M. and alt., Factor Investing Funds Replicability of Academic Factors and After-Cost Performance, November 2022, SSRN