What is Active Management?
1715 reads · Last updated: December 5, 2024
The term active management means that an investor, a professional money manager, or a team of professionals is tracking the performance of an investment portfolio and making buy, hold, and sell decisions about the assets in it. The goal of any investment manager is to outperform a designated benchmark while simultaneously accomplishing one or more additional goals such as managing risk, limiting tax consequences, or adhering to environmental, social, and governance (ESG) standards for investing. Active managers may differ from other is how they accomplish some of these goals.For example, active managers may rely on investment analysis, research, and forecasts, which can include quantitative tools, as well as their own judgment and experience in making decisions on which assets to buy and sell. Their approach may be strictly algorithmic, entirely discretionary, or somewhere in between.By contrast, passive management, sometimes known as indexing, follows simple rules that try to track an index or other benchmark by replicating it.
Definition
Active management refers to the process where investors, professional fund managers, or teams track the performance of an investment portfolio and make decisions about buying, holding, and selling assets. The goal is to outperform a designated benchmark while achieving additional objectives such as risk management, minimizing tax consequences, or adhering to Environmental, Social, and Governance (ESG) investment standards.
Origin
The concept of active management originated in the early 20th century as financial markets became more complex and investment tools diversified. Investors began seeking ways to achieve returns above the market average. In the 1970s, with the development of modern portfolio theory, active management became a mainstream investment strategy.
Categories and Features
Active management can be categorized into various types, including equity active management, bond active management, and mixed-asset active management. Its features include reliance on investment analysis, research, and forecasting, which may involve quantitative tools and the judgment and experience of investment managers. The advantages of active management are its flexibility and potential for high returns, but it also comes with higher fees and risks.
Case Studies
A typical case is Fidelity Investments, whose actively managed funds have performed well during market fluctuations by successfully selecting high-performing stocks through in-depth research and analysis. Another example is Vanguard Group, known for passive management, but some of its actively managed funds have also achieved market-beating returns through professional investment teams.
Common Issues
Common issues investors face when applying active management include high management fees and selecting the right fund manager. A common misconception is that active management always yields above-market returns; however, market uncertainty and management fees can lead to actual returns being lower than expected.
