Active Management

By
rjonesx
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Definition

Active management refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming an investment benchmark index. In passive management, investors expect a return that closely replicates the investment weighting and returns of a benchmark index and will often invest in an index fund.

Active Management

Active management is a strategy for managing the portfolio of an investment fund. It implies the use of a manager or a team which is expert in finding the relevant knowledge about different market elements to take the best investment decision according to human judgments rather than simply using a set of statistics.

Active management is different from indexing which a form of passive management. Active managers usually employ their experience to identify market behaviors, and use the given data to convert it into more useful information. They are responsible for buying, holding, and selling securities in this management method.

Advantages of Active Management

There are many high performance indexes which are available these days to help in taking an investment decision. The aim of active management is to ensure that a fund can consistently perform better than the indexing standards. This practice differs from the use of efficient market hypothesis. It relies on the use of multiple strategies in order to locate the best securities for investment.

The aim of active management is to find underpriced funds by using statistical tools, and then relying on industry experience. This experience and the availability of the trends of the previous years allow active managers perform better, and really help a fund gain an upper hand and beat an index such as the Standard and Poor’s 500 index.

Difficulties in Active Management

The indexes used in fund management are designed with a set of best practices, and it can be very difficult to predict the market behavior based on human cognition. This means that most active managers fail to perform better than the proposed indexed funds, but there are always some who are able to join the dots together and find a dynamic strategy that allows their active funds to perform better that indexed funds.

The Goal of Best Performance

The active fund manager often needs the relaxation to be able to allocate funds in different market classes such as move funds between bonds and active shares. Most investors have a fixed portfolio and they often do not allow managers to move among different market commodities because they already have an asset allocation in place.

Dynamic investors though can find the best results with active management that do not need to fix the location of a fund and allow managers to invest in the best market security which may alter with the change of time.

Further Reading

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