Financial Dictionary - Active Management
The objective of this management system is to produce better returns for the managed portfolio than the market average by using independent criteria based on the manager's information and experience in selecting investments. It is the opposite of passive management which simply mirrors a market index.
To meet the objective of outperforming its benchmark, the actively managed fund focuses on selecting the best assets and using a tactic known as market timing to buy at low prices and sell at high prices.
This type of management requires a management team with excellent analytical skills, a robust knowledge of the market and plenty of experience. Identifying the best investment opportunities that are capable of yielding higher returns than the market average takes much more time and dedication by the managers.
Although active management doesn't seek to mirror an index, as is the case with passive management, it does use an index as a benchmark to measure its own performance and try and outperform the index.
The main features of active management are as follows:
- The management team tracks and controls investments constantly to be able to react quickly to any unexpected events.
- Managers strive constantly to achieve higher returns to satisfy the interests of their investors. Efficient management can help to minimise losses at critical times.
- Due to the demands made of management teams have, the fees for this type of management are higher than those for passive management.
- If the management is inadequate, the losses could be greater than those of the benchmark.
There are a large number of actively managed funds. These funds are attractive to investors because they aim to generate higher returns than those obtained from investing in a benchmark index.
When choosing between active management and passive management, it's important to bear in mind your investor profile and needs and base your choice on these preferences.
There are two schools of thought behind passive management and active management with different views of stock market movements. One sees markets as efficient, which makes it impossible to predict how an index will perform, while the other sees markets as inefficient, which does make it possible to predict how an index will perform using all kinds of methods and analyses to achieve a higher return.