active manager is likely to keep a portion of the fund’s assets in cash, ready to invest if an enticing opportunity arises—or ready to meet redemption requests if lots of investors decide to sell their shares in the fund. Keeping some cash on hand isn’t a bad idea, and it’s handy when the market falls. But cash doesn’t earn a return, so it will underperform stocks over time, assuming that the market continues its general upward trajectory. Ultimately the resulting “cash drag” tends to have a negative impact on the returns of actively managed funds.
