A form of management strategy in which active managers conduct rigorous investment operations with the aim of outperforming the market benchmark return.
Active Management Details
Active management relies on the constant buying and selling of stocks to maximize returns. An active portfolio manager performs frequent transactions on the stock market to exploit fluctuating market prices. Active management strategies are usually risk-intensive but provide benefits that exceed the marker's expectations.
Active managers use extensive forecasts and research to determine when to enter the market. Due to the high reward management performance, active managerial roles are prevalent in the market. Active managers usually have over twenty years of experience in the stock market.
Data analysis, requirement gathering, and investment analysis are among the key skills of an active manager. Passive management is the exact opposite of active management, where the market operations are much more relaxed and risk aversive. Active managers proactively monitor the stock market for any significant fluctuation and use their expertise to dive into locking a transaction at the right time.
Real-World Example of Active Management
Fidelity Investments is an American financial services corporation based out of Boston, Massachusetts. They are one of the largest asset managers in the world, with over $4 trillion assets under management, and provide a wide range of services like brokerage, wealth management, cryptocurrency, life insurance, etc.
Fidelity investments have rich experience in working in active management with over seventy years of experience. They have a highly technical and experienced group of portfolio managers striving to manage and exceed client expectations. Most portfolio managers at Fidelity have over five years of working experience in the field of active management.
Over 84% of equity funds at Fidelity have exceeded the market benchmark. They offer a variety of funds catered for every investment need with over fifty active equity funds.
Significance of Active Management
Actively managed funds are usually more expensive than passively managed funds. Active management can disrupt the whole stock market. Active managers can purchase undervalued stocks and sell them as soon as there is a significant positive fluctuation in the stock prices. They can also purchase overvalued stock options and short-sell them.
Active management involves three processes. The first step is the planning process, where the investor's objectives and constraints are analyzed along with their risk and return expectations. The outcome of this process is the Investment Policy Statement (IPS) which outlines the entire investor portfolio, the management fees, and investment strategy. Based on the IPS, the active manager prepares a capital market expectation and a risk profile for the client.
The next step in the active management process is executing operations on the stock market based on the analysis in the planning stage. The active manager identifies the type of stock options to invest in based on the customer's IPS—the final stage in the feedback process where the manager evaluates portfolio performance against the customer's expectations. The active manager can adjust the client's investment objectives according to portfolio performance.
Active Management vs. Passive Management
Active managers proactively monitor every market fluctuation to maximize returns and exceed existing benchmarks. A passive management strategy follows a relaxed investing approach where the portfolio is tied to an index, and the passive manager does not react to market changes.
In a passive management approach, the market returns are along the lines of a specified index. Active management involves a high volume of transactions in the stock market, which leads to higher operating costs and increased tax on returns. In a passive management approach, the volume of transactions is lower, resulting in lower operating costs.
Passive management believes in a long-term buy-and-hold strategy and ignores short-term fluctuations. It is a risk-aversive strategy and is suitable for investors who are looking for relaxed growth on returns.