The opposite approach is the 'passively managed' fund, where the manager simply uses a computer programme to track the performance of a given market index.

Active fund managers start with a disadvantage in attempting to beat a stock market index as their costs are greater - they have to pay the salaries of expensive fund managers and research analysts, in addition to which dealing costs are not reflected in the performance of an index of shares. The net effect of this handicap could be as much as 2 per cent.

Active fund managers usually construct portfolios of between 60 and 80 holdings, although some can have a much greater number depending upon the size and investment policy of the fund. Portfolios tend to cover as broad a spread as possible, although most active fund managers think that they can find greater market anomalies in the small and mid-cap sectors of the market.

Essentially, active fund managers are betting that their view of the market will be right by overweighting the sectors or individual stocks that they think will perform well and underweighting, or avoiding altogether, those which they think are overvalued.

The key element of active management is that it allows the manager the flexibility to adapt to changing market conditions.