In Defense of Actively Managed Funds
Index funds typically outperform actively managed ones, but owning funds run by smart people isn't as crazy as folks think. Here are some top picks.
I'll start with what you already know: Index funds, with portfolios determined by computer algorithms to reflect categories of stocks and bonds, have a much better track record than funds whose stocks and bonds are selected by human beings — so-called actively managed funds.
Over the 10 years ending December 31, 2025, research firm Morningstar calculates, only 3.6% of active large-capitalization growth funds have beaten the average index fund in the same category.
I enthusiastically endorsed index funds in the 1999 book I coauthored, Dow 36,000, and I have advocated them ever since.
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Investors have caught on. In 2010, index securities held just 19% of the total assets in mutual funds and exchange-traded funds (ETFs); at the end of 2025, the figure was 52%. For funds that own U.S. stocks, index funds now hold 63% of assets.
Index funds took off after Vanguard aggressively cut fees and other fund houses followed suit. The Vanguard S&P 500 ETF (VOO), with $1.7 trillion in assets, has an expense ratio of just 0.03%, or $30 a year for a $100,000 investment. The iShares Core S&P 500 ETF (IVV) levies the same fee, and mutual fund Fidelity 500 Index (FXAIX) charges just 0.015%. That compares with about 1%, on average, for managed funds, according to the Investment Company Institute (PDF). (Prices, returns and other data are through June 30 unless otherwise noted; stocks and funds I like are in bold.)
So why not join the crowd? Is there a reason to own actively managed funds? Yes — two.
The first is that an index fund, by definition, will never beat its index after expenses. An active fund has a shot. Second, choosing an active fund and rooting it on is one of the thrills of investing.
In search of the best actively managed fund
Some mutual funds do beat the indexes. In 1996, I set out to find America's best mutual fund. I was seeking a diversified U.S. large-company stock fund with great long-term returns, comfortable risk levels, a decent expense ratio and strong prospects.
My choice then is my choice today: Fidelity Contrafund (FCNTX), which has returned an annual average of 18.2% over the past 10 years, compared with 15.5% for the S&P 500 index. Contrafund has beaten a majority of funds (including index funds) in its category for five calendar years in a row and so far in 2026.
The fund may have started with a contrarian bent, as the name implies, but it's now a large-cap growth fund. Will Danoff, who has managed or co-managed Contrafund for 36 years, has the courage of his convictions. He'll retire at the end of the year, but I'm optimistic about the two veteran Fidelity managers who will succeed him, and the firm has a deep bench of analysts.
Contrafund first added Nvidia (NVDA) to its portfolio in 2016, and it's now the fund's top asset. Danoff bought Alphabet (GOOGL) in 2004 when it went public. Lately, he has been trimming technology stocks, especially Meta Platforms (META) and Microsoft (MSFT), and the sector represents a smaller proportion of Contrafund's portfolio than it does of the S&P 500.
Contrafund has whipped the index while charging expenses of 0.74%, which is more than 20 times what Vanguard's S&P 500 ETF charges but still relatively low for an actively managed fund. (Funds with people doing the picking are more expensive to run than index funds — after all, computers don't need health insurance.)
If you believe that stocks are priced efficiently — the price of a stock being a reflection of everything that's known today about a company's future prospects — then beating the performance of a market index is undoubtedly difficult. Throw in the expense differential, and active managers would seem to have an impossible task.
Also, when a fund does beat the index, it could be luck. In an experiment, S&P Global, a major compiler of indexes, found that 336 actively managed funds were in the top half of a universe of more than 1,000 funds after a year. But after two years, just 81 of those active funds were still in the top half; after four years, 43.
A rich legacy for active funds
How do you find the favored few? I look for managers who have a long track record, a taste for bucking the market, and the bravery to buy and hold. It's true that many of the great managers of yesteryear are gone, but in some cases their funds and investing strategies live on.
Take Philip Carret, who founded the Pioneer Fund in 1928 and ran it through his retirement in 1983. Carret, a bargain hunter, died in 2003 at age 101, but his fund today, now called Victory Pioneer (PIODX), has beaten Morningstar's large-cap blend benchmark (a mix of growth and value stocks) in a majority of the past 10 years and so far in 2026. The fund comes with a sales charge, but you can find it load-free at Schwab, E*Trade and perhaps other platforms. The expense ratio is 0.92%.
The fund has lately been adding to its holdings of United Parcel Service (UPS), one of the components of my Top 30, and NRG Energy (NRG), a Houston-based fossil-fuel and renewables power company whose shares have nearly quadrupled in five years as demand for electricity has taken off.
I have always liked mutual funds named and managed by their founders. Upholding a family reputation is good discipline. Many of these are now run by family members. A good example is Davis New York Venture (NYVTX), co-managed by Christopher Cullom Davis, who took over from his founding father, Shelby, in 1995. You can find it load-free at Fidelity, Schwab and E*Trade; the expense ratio is 0.91%.
The fund has ranked in the top half of its peer group (currently large-cap value funds) in seven of the past 10 years, outpacing the S&P 500 Value Index by 1.4 percentage points annualized over the past decade.
The Davis fund is light on technology and heavy on financial services, including its top holding, Capital One Financial (COF), which specializes in credit cards, both under its own brand and that of several leading retailers. Research firm Value Line forecasts the stock's earnings will rise by an average of 13.5% annually for the next five years.
With his son Michael, founder Ron Baron still co-manages Baron Partners (BPTRX), which has had a spectacular decade, beating the S&P 500 by an annual average of more than nine points, again despite high fees. The portfolio is highly concentrated: just 23 stocks, with Tesla (TSLA) the top holding at nearly one-fourth of assets. But that kind of conviction is how a manger beats an index.
Similarly, Baron Focused Growth (BFGFX), also managed by father and son, is in the top 2% of its category (mid-cap growth), returning an annual average of 21.5% over 10 years.
Want more evidence that stock pickers can whip computers? Look to small-cap funds. Both Oberweis Small-Cap Opportunities (OBSOX), another fund managed by a member of the founding family, and T. Rowe Price Small-Cap Value (PRSVX), managed by J. David Wagner for the past 12 years, have been beating their respective target indexes.
So have three funds that are currently closed to new investors but may reopen, so keep an eye on them: Harbor Small-Cap Growth (HISGX); Invesco Discovery (OPOCX), which has returned nearly 39% so far in 2026; and Fidelity Small-Cap Growth (FCPGX), in the top half of its category for nine of the past 10 years.
Of course, you should own index funds, but owning funds managed by smart people is not as crazy as many investors think. The legendary John Bogle, the late Vanguard CEO, called such investing akin to a second marriage: the triumph of hope over experience. Actually, many second marriages do work out — and so do managed funds.
James K. Glassman chairs Glassman Advisory, a public-affairs consulting firm. He does not write about his clients. His most recent book is Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence. He owns none of the securities mentioned here. You can reach him at JKGlassman@gmail.com.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
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