Active and passive fund management is one of the main divisions of portfolio management theory. They comprise different styles, each with its advocates and detractors.
On one side, passive management advocates not following any strategy other than replicating the market, as represented by its benchmark index.
On the other hand, there are advocates of another theory related to markets’ randomness and inefficiency. Such managers argue that it is possible to beat the market through appropriate stock selection, by carrying out “active management” of the portfolio.
The key selling point for passive management is low fees. With less or no human intervention from a portfolio manager to remunerate, costs are usually much lower than active management strategies. While fees affect returns, there’s more to successful investing than just cutting costs.
Currently, we start to feel that we have some normality back; however, we are still living in uncertain times, especially when it comes to the prospects of recovery and the aftershocks that can survive as a consequence of the global economic downturn caused by COVID-19.
In the face of the volatility that this crisis has brought, our savings and investments can be at risk. In times of volatility, emotions can lead our decision-making astray.
However, volatility is vital for a healthy market. It might be just what is needed to reconfigure portfolios to operate more efficiently. In fact, volatility can be positive if approached strategically.
Why is active management important in mutual funds?
More and more investors are choosing to swim in the sea of investment funds due to the liquidity they offer and their fiscal accessibility*. Among the options this financial product provides, it is necessary to find the one that best suits one’s needs and obtain higher profitability.
Once this comprehensive study has been carried out, the manager will follow a strategy, making decisions with respect to the benchmark index taken for the investment fund. This type of action aims to select financial assets and outperform the returns and yields of a given market.
This type of action aims to select financial assets and outperform the returns and yields of a given market.
*Fiscal treatment of investments can vary in accordance with your specific circumstances and is subject to change in the future.
Some investment funds that follow actively managed strategies can outperform their benchmarks with lower levels of risk over the long term.
The most important advantages of active management are:
- Alignment of interests between manager and investor.
- Active management makes it possible to ride out times of increased market volatility.
Higher long-term appreciation potential for actively managed investment funds than for those that are passively managed.
In addition, active management might allow us to take greater exposures to specific sectors, themes, or styles that we believe can perform well over the medium to long term.
Whether following an active management strategy if for depends on your investor profile, financial goals but also in ensuring that your fund manager’s interests are aligned with yours.
In times of crisis, the lone investor longs for guidance from a professional voice.
Having the guidance of a professional in the most difficult moments can be crucial in managing our money, steering us away from any impulsive decisions, and helping us to minimize the impact. Because every investor is different, tolerates risk differently, and has different objectives.
At Altarius, we will study your case in-depth to offer you personalized and tailor-made solutions.
When investing, capital is at risk and you may recover less than the original investment. Please invest aware.