Identifying skilled managers is not the only way to achieve above-market returns from investing in active funds. Despite limited evidence of outperformance at the fund level, we document that a passive “indexation” strategy of actively managed sector funds earns an annual benchmark-adjusted return of 5.70%, and a monthly alpha of 27 basis points over next-best investable passive funds. The strategy’s outperformance is present in market downturns (i.e., resilient to tail risk) and robust to different rebalancing frequencies and inclusion of expenses. We provide an alpha arithmetic as explanation for strategy’s success and as principle for creating similar portfolio strategies. 

JEL Classification Numbers: G11, G20, G23.
Keywords: alpha, managerial skill, mutual funds, passive investing.​