A transparent ranking that surfaces the top-quintile small- and mid-cap active funds the mainstream databases systematically under-rate — the original evidence base behind Viquo's "affordable alpha" thesis.
Over the past decade, the ascent of passive investing — which by 2024 represented over half of US long-term assets — radically transformed industry dynamics. It drove down fees, reshaped the incentives of financial advisers, and created a feedback loop in which passive inflows concentrate capital among a handful of high-profile firms, lifting their prices while value managers underperform and are compelled to sell — proceeds that flow back into passive strategies, perpetuating the cycle. (We set out this distortion in full in Unlocking the Active vs Passive Debate.)
That cycle is reinforced by industry ranking practices that disproportionately favour large funds, which garner trust through established brands and infrastructure. A closer inspection reveals a systemic bias: while large funds receive thorough evaluation, smaller ones — with AUM below $1 billion — are assessed via a more formulaic approach. This not only distorts perception but conceals genuine opportunity in the long tail (see Box 1).
Despite this, small actively managed funds have demonstrated an ability to outperform passive funds — especially for large institutional investors, and especially outside the US large-cap market — when managed with an optimal fee structure (see Box 2).
Such conditions create real opportunity for those who can identify top performers at the right cost. Viquo’s first expression of this thesis, in 2024, was a dual solution: the Viquo 100, a transparent ranking of small and mid-sized actively managed funds, and an automated platform to enhance their visibility while streamlining — and cheapening — the investment process.
Based on verified data drawn directly from fund managers and designed for HNWIs and family offices, the ranking blended quantitative and qualitative sources to organise funds into 20 searchable categories under a transparent rating methodology. Within each category, funds were ranked by risk-adjusted performance, net of fees, selecting only the top quintile of funds under $1 billion in AUM to form the Viquo Premier Selection. From that pool, deeper analysis compiled the Viquo 100 — a curated list of the best funds and their managers, accessible directly or through a multi-fund SMA platform.
Historically, phases of market concentration have often been followed by a dispersal of returns to smaller entities and a shift towards active and value styles. The future is never certain, but the balance between active and passive was tipping at unprecedented levels of concentration — a landscape ripe with overlooked opportunity for value-driven investors, especially in the long tails of the market.
By widening access to these undervalued funds, the aim was not only affordable alpha for HNWIs and family offices, but more efficiently priced markets overall.
Box 1 — Morningstar: the standard in fund ratings
The Morningstar star rating is a quantitative system that evaluates funds on their past risk-adjusted performance relative to peers within the same Morningstar Category. As of 2024, each fund across 302 categories is ranked on its trailing three-, five-, and ten-year returns.
The star rating follows a bell-curve distribution: the best-performing 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the middle 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star.
Beyond the star rating, Morningstar’s Medalist rating is determined by human analysts who assess a fund’s potential to outperform its category over time, across five pillars: Process, People, Performance, Price, and Parent. At the time of analysis, the Analyst Rating covered 21,400 vehicles globally, out of a universe of 383,000 covered algorithmically — about 5.3% of the total. Funds rated Gold, Silver, or Bronze are expected to outperform their categories; Neutral, to perform in line; Negative, to underperform.
Morningstar is great (for large funds…)
Morningstar ratings are an industry standard, but there appears to be an asymmetry in how rigorously they are established — driven by factors that do not correlate with alpha. Analyst attention is concentrated on large-cap funds, leaving smaller funds to a more basic model that, in effect, undermines small-cap funds as an asset class.
To test this, we recreated the rating calculation on a separate sample of 2024 Morningstar US data and checked for predictive power.
Data overview: - Data source: morningstar.com (US investments), 2024 - Data criteria: Morningstar Medalist Rating = Gold; Morningstar Rating = 5★ - Net assets: $100–1,000M (split into $100–500M and $500–1,000M)
Funds meeting the criteria: - $100–500M in assets — total securities: 6,047; top-rated: 30 (0.5%) - $500–1,000M in assets — total securities: 3,015; top-rated: 23 (0.8%) - For comparison: - $1–25bn: 8,352 securities (1.9% top-rated) - $25–50bn: 343 securities (9.0% top-rated) - $50–100bn: 205 securities (13.2% top-rated) - $100bn+: 256 securities (3.1% top-rated)
Consolidating the funds into two groups and running a chi-squared test shows that funds over $1 billion are significantly likelier to hold top ratings, at a 99% confidence level. This could reflect a greater number of low-quality small funds, a bias in the rating system, or both — but the gap is too large, and too systematic, to dismiss.
Box 2 — Active management’s edge
Active funds have shown they can outperform passive funds — particularly for large institutional investors, when managed with an optimal fee structure. Despite the prevalent belief, supported by historical data, that active management generally underperforms after fees (Sharpe, 1991), recent evidence suggests a different narrative for certain sectors and client types. According to CEM Benchmarking, which analysed returns from 1992 to 2020, actively managed funds exceeded their benchmarks by 0.67 percentage points gross of costs. The net benefit remains positive at 0.15 points after fees — underscoring the critical role of fee management in preserving the value-add of active management. The advantage is most evident outside the US large-cap market, where inefficiencies still offer opportunities for skilled managers.
For large institutional clients, where fees are more contained than for retail investors, that slight edge can translate into significant value given the scale of investment. These findings align with the UK Competition and Markets Authority’s market study, which also noted the superior performance of actively managed funds rated ‘buy’. Coupled with streamlined processes and reasonable costs, active funds can offer superior returns — which is precisely why they remain a preference among sophisticated investors.
Where this leads — The reframing of the active/passive debate that motivates this ranking is set out in Unlocking the Active vs Passive Debate (2024); the case for rotating toward overlooked active funds before the cycle turns is Navigating the Inevitable (2024); and the mature form of the argument, two years on, is The Return of Judgement (2026).
Viquo Insights presents the editorial views of the author and the firm’s ongoing, exploratory thinking. It is provided for information and discussion only, and is not investment advice, nor an offer or solicitation to buy or sell any security or to adopt any investment strategy. You should do your own research, and we would always be very happy to know what you think, what you find, and how we can learn together.