The term active return refers to the gain or loss on an investment portfolio as a result of active management decisions. A fund's active return is the percentage gain or loss relative to a benchmark index.
Active Return = Return of Portfolio - Return of Index
Also known as excess return, active return refers to the portion of an investment's gain or loss that can be attributed to the decisions made by an active portfolio manager. This metric does this by removing the investment's return that can be attributed to the overall market's movement. If the fund is able to achieve returns in excess of the market index, it will have a positive active return. If the fund underperforms relative to the market index, it will have a negative active return.
It is important for the investor to know the index used when benchmarking the active return of a fund. For example, a fund that attempts to outperform technology stocks might underperform relative to the S&P 500, and still return a positive active return relative to a technology index such as the NASDAQ Composite.
Fund A is an actively managed technology mutual fund, which provided its investors with a return of 12.3% last year. The objective of the fund is to beat the performance of the NASDAQ Composite Index, which had a total return of 15.6%. The active return of Fund A would be calculated as:
= 12.3% - 15.6%, or -3.3%