What is active investment management?
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.
Active portfolio management focuses on outperforming the market in comparison to a specific benchmark such as the Standard & Poor's 500 Index. The performance can be measured using Active Share and by comparing portfolio holdings to the benchmark.
Key Takeaways. Active investing requires a hands-on approach, typically by a portfolio manager or other active participant. Passive investing involves less buying and selling, often resulting in investors buying indexed or other mutual funds.
Active investing refers to an investment strategy that involves ongoing buying and selling activity by the investor. Active investors purchase investments and continuously monitor their activity to exploit profitable conditions.
With active management, much of the success or failure to generate higher returns depends not only on the manager's ability to identify investment opportunities, but also on their ability to mitigate risk. Proactively identifying, assessing, and mitigating potential risks in a portfolio are essential.
One of the benefits of active management is that it provides the potential to minimize exposure to dramatic market correction. A passive portfolio will not only track its underlying index higher but will also follow it downward if the index drops suddenly.
Active management theory deals with how an investor should construct a portfolio given an assumed competitive advantage or skill in predicting returns. Thus, active management relies on the assumption that financial markets are not perfectly efficient.
Portfolio management is the selection, prioritisation and control of an organisation's programmes and projects, in line with its strategic objectives and capacity to deliver. The goal is to balance the implementation of change initiatives and the maintenance of business-as-usual, while optimising return on investment.
Active portfolio management is a hands-on investment approach where investors and fund managers use various strategies to select securities and allocate assets with the aim of achieving superior returns compared to market benchmarks or indexes.
An example of active investing
For example, let's say you invest in an actively managed U.S. large-cap stock mutual fund. The fund is handled by a professional portfolio manager who analyzes and selects which individual stocks will be included in the fund.
What is the risk of active investing?
Active risk arises from actively managed portfolios, such as those of mutual funds or hedge funds, as it seeks to beat its benchmark. Specifically, active risk is the difference between the managed portfolio's return less the benchmark return over some time period.
Beyond the types of investments they hold, mutual funds also can be categorized based on their fund manager's investment style – active management or passive management. In general terms, active management refers to mutual funds that are actively managed by a portfolio manager.
Passive investing targets strong returns in the long term by minimizing the amount of buying and selling, but it is unlikely to beat the market and result in outsized returns in the short term. Active investment can bring those bigger returns, but it also comes with greater risks than passive investment.
Active equity management approaches can be generally divided into two groups: fundamental (also referred to as discretionary) and quantitative (also known as systematic or rules-based).
That said, the level of dispersion among managers varies by asset class. This implies that skilled (or lucky) active management can add more value in certain asset classes than others. These tend to be more volatile asset classes, such as equities.
It is a process that includes analysis of the current financial situation, investment goals, asset allocation, investment strategy, management and rebalancing of the portfolio to generate maximum returns.
The fundamental objective of portfolio management is to help select best investment options as per one's income, age, time horizon and risk appetite. Nonetheless, to make the most of portfolio management, investors should opt for a management type that suits their investment pattern.
Safety, income, and capital gains are the big three objectives of investing but there are others that should be kept in mind as well.
A notable example of active portfolio management is the Fidelity Contrafund, one of the largest actively managed mutual funds with over $107 billion in assets as of June 2023. Since its inception in 1967, the fund has outperformed the S&P 500 index by an average of over 2% per year.
Active risk management includes the assignment of mitigation responsibilities to appropriate project participants and the oversight of follow-through regarding every risk factor. This chapter reviews some tools and methods that can form the basis for the development of risk management excellence by owners.
What are the benefits and risks of investing?
Investing in stocks offers the potential for substantial returns, income through dividends and portfolio diversification. However, it also comes with risks, including market volatility, tax bills as well as the need for time and expertise.
Active management has benefits, such as the potential for higher returns, the ability to adjust to market conditions, and the opportunity for diversification. However, active management also has drawbacks, such as higher fees, difficulty in consistently outperforming the market, and the risk of human error.
Active fixed income enjoys a cost advantage: Fees for active bond managers generally are lower than fees for active equity managers. This reduces the cost advantage of passive fixed income strategies relative to passive equity strategie.
Portfolio management will allow you to consider your past investments while developing your new investment strategy. You can make an informed decision after considering the age factor, risk propensity, income, and budget. This comprehensive decision-making process will eliminate the risk of huge losses.
An actively managed portfolio is an investment portfolio where the individual investments are chosen and managed by a human investment advisor. This means that the investment advisor actively buys and sells investments in the portfolio, instead of following a preset, static asset allocation.
