By Mark Fitzgerald, Head of Product Specialism, Europe


  • In a challenging year for global financial markets, we consider what advisers may be looking for when choosing a skilled active manager with the potential to outperform the market.
  • Understanding the relationship between costs and net returns helps financial advisers to navigate the actively managed funds offering.
  • For investors comfortable with taking on active risk, we believe that low-cost funds managed by a skilled fund manager are key to an active fund’s success. 


It’s been a challenging year for global financial markets with volatility remaining high as monetary policy tightening continues in the face of stubbornly high inflation. Against an uncertain macroeconomic and geopolitical backdrop, the FTSE All World index has returned -8.79% year to date1 with the Bloomberg Global Aggregate Float-Adjusted and Scaled index down -15.81%2 over the same time period.

For investors and their advisers looking for the opportunity to outperform a target benchmark in the current climate and who have the patience for alpha to emerge, low-cost actively managed portfolios could be a good option.  The question is how do they choose a skilled active manager with the potential to outperform the market?

Vanguard is one of the world’s largest active managers, with more than €1.5 trillion in assets actively managed globally3. Over the past 50 years, we have developed a distinct active management philosophy based on stability, experience and a focus on long-term, low-cost investing.

Our research has found that low costs have been the most consistent and effective quantitative factor in improving an investor’s odds of higher relative performance. This can be particularly true in challenging market environments when costs will have a bigger proportional impact on their final return.

Costs are negatively correlated with excess returns on average4

To get a better understanding of the relationship between costs and net returns, we analysed managers’ excess returns as a function of their expense ratios across various investment sectors over a 10-year period. As expected, higher expense ratios were generally associated with lower excess returns.

The chart below offers a visual snapshot of the research using global equity funds as an example. The yellow dotted line represents the average trend for active funds, respectively, with 10-year annualised excess returns measured by the y-axis and expense ratios measured along the x-axis.  The chart shows how lower costs can lead to higher relative performance for active funds.

Higher expense ratios were associated with lower excess returns

4 Past performance is no guarantee of future results.
Notes: All data as at 31 December 2021. Each plotted point represents an equity or bond mutual fund or ETF within the specific style and asset group. Fund universe and categories are as defined in Figure 3 and the Appendix. Each fund is plotted to represent the relationship of its expense ratio (x-axis) versus its ten-year annualised excess return relative to its stated benchmark (y-axis). The straight line represents the linear regression, or the best-fit trend line – that is, the general relationship of expenses to returns within each asset group. The scales are standardised to show the slopes’ relationship to each other, with expenses ranging from 0% to 3% and returns ranging from -10% to 10% for equity funds. Some funds’ expense ratios and returns may go beyond the scales and are not shown. NAV-based performance; returns calculated in EUR, net of fees with income reinvested.
Sources: Vanguard calculations, based on data from Morningstar, Inc.

However, no quantitative factor alone can ensure outperformance. At Vanguard, when evaluating managers, we focus on strict qualitative criteria, not short-term performance.

In all cases, we select the manager that we believe is best positioned to manage a particular strategy based on a range of considerations.

How Vanguard chooses active managers

Vanguard’s Oversight & Manager Search team is tasked with assessing all of our active managers. The O&MS team of more than 25 professionals is dedicated to doing this as part of its wider due diligence programme for external and internal managers and is incorporated as part of the four pillars of assessment that we have traditionally used to guide our search for active managers: firm, people, philosophy, process.

Firm: We assess firms’ ethics, stability, operations and management structure. We consider succession planning and risk management controls.

People: We look for strong and diverse portfolio management teams with low turnover. We consider the integrity, conviction, and enthusiasm of the firm’s investment professionals.

Philosophy: We assess the durability and efficacy of a firm’s approach. An investment philosophy must be clear and easily articulated.

Process: We look for proven, repeatable processes.

Vanguard active fixed income

At Vanguard, our active fixed income funds are managed internally. Rather than taking aggressive positions, our Fixed Income Group aims for a consistent string of small victories over time. Our highly experienced credit research teams guide our decisions on sector overweights and underweights and issuer exposures.

Our fixed income team seeks to add value from sector allocation, duration, curve, security selection and other rates strategies. And our portfolios are managed in a highly risk-controlled way across multiple dimensions of risk. This can be quite different from some active managers who may take on more aggressive risk profiles relative to their benchmarks.

Against a very uncertain macroeconomic and geopolitical backdrop, we believe that investors and their advisers need to focus on what they can control.

While advisers have no control over when, and by how much, markets will move, they can control how much of the market’s return clients receive by focusing on their costs. At Vanguard, low costs are the key starting point which lowers the hurdle talented portfolio managers need to clear.

For investors comfortable with taking on active risk, we believe that low-cost active funds managed by a skilled fund manager are key to long-term investing success.


1 Source: Bloomberg, total returns, EUR, as at 31 October 2022.

2 Source: Bloomberg, total returns, EUR, as at 31 October 2022.

3 Source: Vanguard, as at 31 October 2022.

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Past performance is not a reliable indicator of future results.

Important information

For professional investors only (as defined under the MiFID II Directive) investing for their own account (including management companies (fund of funds) and professional clients investing on behalf of their discretionary clients). In Switzerland for professional investors only. Not to be distributed to the public.

The information contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this document does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this document when making any investment decisions.

The information contained in this document is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.

Issued in EEA by Vanguard Group (Ireland) Limited which is regulated in Ireland by the Central Bank of Ireland.

Issued in Switzerland by Vanguard Investments Switzerland GmbH.

Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.

© 2022 Vanguard Group (Ireland) Limited. All rights reserved.

© 2022 Vanguard Investments Switzerland GmbH. All rights reserved.

© 2022 Vanguard Asset Management, Limited. All rights reserved.