All active fund managers are judged on their ability to outperform the market and show superior stock-picking skills that justify the higher fees incurred by investors.

That skill is known in market lingo as alpha. It’s no easy task, a key reason why most fund managers don’t beat the market. We screened for funds that have the highest levels of alpha and found that five showed superior outperformance over one year:

What is Alpha?

Morningstar’s glossary defines alpha as “the amount by which a fund has outperformed its benchmark, taking into account the fund’s exposure to market risk (as measured by beta). Alpha is also known as the “excess return” or “residual return”.

So alpha is defined in relation to “beta”, the second letter of the Greek alphabet, and a proxy for the benchmark and/or market return. Beta is “a measure of a fund’s sensitivity to market movements”, our glossary explains. Beta is usually defined as a number rather than as a percentage.

“The beta of the market is 1.00 by definition. A beta of 1.10 shows that the fund has performed 10% better than its benchmark index in up markets and 10% worse in down markets, assuming all other factors remain constant.”

Index tracking funds and ETFs are effectively offering beta, which explains the much smaller fees in comparison with active funds.

Beta Can Be Easy, And Good Luck Runs Out

When markets are in record territory, as the UK is currently, achieving beta can be enough for investors looking to beat inflation and the returns on cash and bonds. High exposure to hot stocks like Tesla (TSLA) and Nvidia (NVDA) can also boost returns for active managers if their portfolio weighting is above the benchmark. Clever timing – or what some might call “good luck” – can matter as much as superior stock-picking in some cases. Alpha doesn’t distinguish between “good luck” and “superior judgment”, although the former doesn’t often persist over long periods.

In market downturns, investors particularly value active stock picking. These periods can often make the reputation of active managers who face much tougher conditions than when a “rising tide lifts all boats” in bull markets. 

But as Morningstar’s Active/Passive barometer regularly shows, the majority of active funds do not achieve alpha over the long term, across many market cycles, when fees are taken into account.

How Morningstar Calculates Alpha

Morningstar Direct data calculates alpha by taking the excess

All active fund managers are judged on their ability to outperform the market and show superior stock-picking skills that justify the higher fees incurred by investors. In practice, this is much harder to achieve.

Alpha is a key concept in a judgment of whether a manager is adding value beyond matching market returns. And while it’s a term that is often used by investors, it’s not well understood. 

Morningstar’s glossary defines alpha as “the amount by which a fund has outperformed its benchmark, taking into account the fund´s exposure to market risk (as measured by beta). Alpha is also known as the residual return.”

Here alpha is defined in relation to “beta”, the second letter of the Greek alphabet, and a proxy for the benchmark and or/the wider market. Beta is “a measure of a fund’s sensitivity to market movements”, our glossary explains. Beta is usually defined as a number rather than as a percentage.

“The beta of the market is 1.00 by definition. A beta of 1.10 shows that the fund has performed 10% better than its benchmark index in up markets and 10% worse in down markets, assuming all other factors remain constant.”

Index tracking funds and ETFs are offering beta, which explains the much smaller fees in comparison with active funds. When markets are in record territory, as the UK is currently, achieving beta can be enough for investors looking to beat inflation and returns on cash and bonds. High exposure to hot stocks like Tesla (TSLA) and Nvidia (NVDA) can also boost returns for active managers if their portfolio weighting is above the benchmark. Good timing – or what some might call ” good luck” – can matter as much as superior stock-picking in some cases.

But alpha can be much harder to achieve in a wider market downturn, but in these periods investors prize active stock picking the most. These periods can often make the reputation of active managers who face much tougher conditions than when a “rising tide lifts all boats”. 

As Morningstar’s Active/Passive barometer shows, the majority of active funds do not achieve alpha over the long term when fees are taken into account.

How Morningstar Calculates Alpha

Morningstar Direct data calculates alpha by taking the excess average monthly return of the investment over the risk-free rate and subtracting beta times the excess average monthly return of the benchmark over the risk-free rate. 

Five UK-domiciled funds with