Performance matters, everyone knows that and nowhere is that more important than in fund management. Apart from multi-asset funds the aim of every collective investment vehicle must be to deliver a better return than the relevant index, or at least a relevant conventional market cap based index fund. To achieve that aim an active fund has to take more risk, and that can be done in two ways, assuming the portfolio is only constructed from constituents of the index. The manager can either elect not to hold certain stocks that he or she thinks will underperform or he or she can hold larger weights in stocks he expects to do better.

Not holding some shares opens the possibility that something you don't own suddenly does very well. Anyone not holding Lloyds (LON:LLOY) at the end of June would have missed its 7% gain in a week. The other possibility is that something you do own suddenly goes bad for a whole variety of reasons and leaves the fund in a worse position compared with an index fund that only has a modest position.

In any event both tactics increase risk as a trade-off for the expectation of higher return. Indeed, risk is the only variable that can be changed in this race so it not surprising that competing fund managers will progressively increase risk relative to their competitors to get ahead. This is fine while the market is rewarding risk, higher risk generates higher rewards. There are no prizes for being risk averse in a bull market. And there has been a strong one since QE started two years ago.

As a consequence high risk funds currently dominate the league tables. This has created the rather unusual effect that as group the IMA UK All Companies sector has outperformed the FT All Share index over the last year. In the year to the end of May the All Companies Sector was up 21.2% compared to a 20.4% rise in the FT All Share Index, and that is after costs.

This seems rather odd given that because the funds invest in the index, they are the index. How can they beat themselves, especially after costs? There are two answers. Firstly, many funds in the UK All Companies sector invest outside the index. They could be…

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