THE past decade has been tough for conventional “active” fund managers, who try to pick stocks that beat the market. They have been losing business to “passive” funds—those that try to replicate a benchmark, like the S&P500 index. Passive funds have much lower fees.

Figures from Inalytics, a company that analyses fund managers’ portfolios, suggest that active managers are changing strategy in response. The average number of stocks in global equity portfolios has halved, from 121 to 61 (see chart). In a sense, active managers have become more active, making bigger bets on individual stocks. This makes their portfolios less like the index, meaning they can beat the market by a larger margin. But they can also do a lot worse. The portfolios examined by Inalytics have outperformed, but in the long term the average manager is unlikely to do so, since the index reflects average performance.

Moreover, managers incur costs and the index does not. The result of more active management will be a wider range of returns, dispersed around the same mean. For the typical client, that is a poor trade-off between risk and reward.

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