What does being "benchmarked against" a stock index imply for an active fund manager?

Being "benchmarked against" a stock index means that the performance of an active fund manager is measured relative to that index. This implies that the fund manager seeks to construct a portfolio that can outperform the benchmark index, which typically involves identifying investments that may differ from the index holdings.

When a fund manager benchmarks against an index, they are not just trying to replicate the index or invest only in the stocks that comprise it. Instead, the goal is to actively manage the portfolio, which often includes seeking opportunities in securities that are underrepresented or absent in the benchmark. This strategy allows the manager to exploit market inefficiencies and potentially generate higher returns than the index itself.

This approach inherently involves taking different positions or tilting the portfolio away from the index to achieve a better risk-return profile. Rather than reducing risk or strictly adhering to the holdings of the index, the focus is on making strategic investments that can lead to outperformance.