Active fund management or passive? It’s an ongoing debate, but just how much do active fund managers do to drive results and justify their higher fees?

Here are five things active managers do to try to outrun the market.

Create models. Many active managers develop proprietary tools, databases and research models to fashion their own methodologies, says Michael Swope, Milwaukee-based director of manager research for BMO Global Asset Management. Their goal, he says, is to “look for a pattern of success, typically over a market cycle.”

Investors need to be able to identify the model that fund managers use before deciding where they should put their money. “You want to understand how they arrive at their decisions,” says Greg Fayvilevich, a director with the Fitch Ratings Fund and Asset Management Group in New York. “Is there a committee, or is it a star manager approach?”

One key manager is likely to deliver consistent results from a consistent point of view, Fayvilevich says, but what happens if that celebrity manager defects or dies? Succession planning is essential to avoid orphaned funds. “That’s why some investors think that it’s better to go with a team, so that even if the manager changes, the style of managing the fund won’t change.”

Search for the overlooked. “Think of active managers as detectives,” says Jason Voss, content director with the CFA Institute and a former fund manager. A good active manager looks not just in the obvious places — SEC filings, annual reports and industry trend reports — but will also construct his or her own valuation models to “see if the equity is trading at the appropriate price,” he says.

An active manager is also likely to travel to the company’s operations to see the conditions for himself, whether that entails going to a South American mine or a suburban shopping mall. “And then they decide which facts are relevant to really tell the story,” Voss says.

Analysts agree that excavating spreadsheets only goes so far: Hands-on equity managers take a forensic approach to get the full story and implications of what they observe. For instance, is a fleet of shiny new vehicles positioning the company for snappy, snazzy customer service, or do the vehicles represent a drag on cash flow based on poorly conceived leases?

React fast. Active managers should be positioned to quickly make the most of market swings, steering their funds through the daily economic obstacle course, says Ron Carazo, who runs a financial advisory in New Orleans. That’s how actively managed funds can beat average market returns over a period of several years. Still, Carazo says that over a decade or more, few actively managed funds have been able to beat correlated underlying passively managed index funds.

Manage for the ratings firms. One downside of actively managed funds is that their managers can’t help but stay in the lanes prescribed by major fund ratings firms, Voss points out. While independent firms that assess fund performance provide valuable information, they also define fund success, and managers try to hit analysts’ marks.

Funds sometimes divert their own research resources to efforts intended to placate analysts. Parameters set by fund rating firms can have a downside of discouraging rational risk-taking if the result might propel the fund’s results past projections. Mutual funds that are outliers — those on the extremes of performance, both good and bad — draw attention, and experts say fund managers sometimes prefer to stay out of the spotlight with strong, but not shattering, returns.

Guide the so-called “passive” funds. “The biggest misunderstanding is that passive investing is truly passive,” Voss says. Someone has to decide which equities are in the huge omnibus funds, and that’s usually a committee that reviews the criteria — or, in other words, sets the autopilot that will steer the passively managed fund.

Analysts agree that the committees that guide passively managed funds largely operate in obscurity. That’s partly because of their nature and partly to keep the focus on the methodology, instead of the humans that translate the methodology to actual portfolio holdings. Either way, it’s easy for investors to count on the supposedly impassive and impartial construct of an index fund without considering the human decisions that set the whole thing in motion.

And where humans are involved, risk is inherent. “It’s assumed that passive is mistake-free,” Voss says. “But there are risks embedded in passive strategies as well.”

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5 Ways Active Managers Steer Mutual Funds Effectively originally appeared on usnews.com