Active Management

What is Active Management?

Active management is an investment strategy where the investment manager or fund manager makes active decisions to identify investment opportunities that outperform market benchmarks. Unlike passive management, the goal of active management is to achieve superior investment returns through actions such as selecting individual securities, adjusting allocations, and making market forecasts.

Active management typically involves the following activities:

1. Stock selection: Investment managers research and analyze the fundamentals and valuations of individual securities. They choose stocks or bonds that they believe have good investment potential, characterized by low valuations, growth potential, and strong financial health.
2. Asset allocation: Active management includes making decisions about the allocation of different asset classes, such as stocks, bonds, and cash. Based on their assessment of market and economic conditions, investment managers may adjust the weightings between different assets to find the best balance between risk and return.
3. Market timing: Active management involves making buy and sell decisions based on market trends and forecasts. Investment managers may use technical indicators, market momentum, and macroeconomic factors to time the market for better buying and selling opportunities.
4. Active risk management: Active management also includes actively managing risk. Investment managers may take measures to control the portfolio's risk exposure, such as setting stop-loss limits, diversifying investments, and dynamic balancing.

The core idea of active management is to achieve investment returns that outperform the market average through the expertise and decision-making abilities of the investment manager, supported by a research team and resources, along with accurate market analysis and forecasts. However, due to the complexity and uncertainty of the market, active management does not always outperform and typically involves higher management fees.

Characteristics of Active Management

Active management has the following characteristics:

As an investment management approach based on informational advantage and independent judgment aimed at achieving returns that outperform the market, active management has the following features:

1. Active Decision-Making: The core characteristic of active management is that the investment manager or fund manager makes proactive decisions, selecting individual securities, adjusting asset allocations, and timing trades to find investment opportunities that outperform the market average. Unlike passively managed funds, active management investors do not rely solely on the overall market trend but actively make investment decisions.
2. Goal to Outperform Market Average: The goal of active management is to achieve investment returns that exceed the market average. Through the careful selection of individual securities and active asset allocation, investors aim to perform better in the market. They look for undervalued assets with high growth potential and capitalize on market fluctuations to secure favorable trading opportunities.
3. Research-Driven: Active management typically requires extensive research and analysis. Investment managers or fund managers use various tools and information for market research, including fundamental company analysis, financial statement evaluations, industry research, and macroeconomic analysis. This research-driven approach helps investors make more accurate investment decisions.
4. Flexibility: Active management offers greater flexibility. Investment managers can adjust the investment portfolio based on market conditions and investment goals. They can choose assets based on specific characteristics, adjust asset allocations, and trade based on market trends. This flexibility makes active management more adaptive and responsive.
5. Risk Management: Active management usually includes proactive risk management. Investment managers manage portfolio risks based on market conditions and the risk preferences of investors. Strategies such as diversifying investments, setting stop-loss levels, and dynamic balancing are used to control risk exposure.

Advantages and Disadvantages of Active Management

While active management offers flexibility and personalization, it also comes with disadvantages such as high management fees and selection risks. Here are some common advantages and disadvantages of active management in the investment field:

Advantages

1. Flexibility and Personalization: Active management provides greater flexibility. Investment managers can make decisions based on market conditions and the characteristics of individual securities. They can select investment opportunities with higher potential returns and achieve personalized investment portfolios.
2. Opportunity to Outperform Market Average: The goal of active management is to achieve investment returns that exceed the market average. By conducting thorough research, selecting undervalued assets with high growth potential, and capitalizing on market fluctuations, active management investors have the potential to achieve better performance in the market.
3. Risk Management and Asset Allocation: Active management typically includes proactive risk management and asset allocation. Investment managers manage portfolio risks based on market conditions and investors' risk preferences. They can adjust asset allocations to find the best balance between risk and return.

Disadvantages

1. High Management Fees: Compared to passive management, active management is typically associated with higher management fees. Active management requires research and decision-making from investment managers, as well as ongoing market monitoring and analysis, leading to increased management costs for investors.
2. Difficulty of Consistent Excess Returns: Although the goal of active management is to outperform the market average, consistently achieving excess returns is a challenging task. Market complexity, information asymmetry, and unpredictable changes make it difficult to outperform the market consistently. Investment managers cannot always accurately predict market trends.
3. Selection Risk: Active management requires investors to select capable investment managers and funds. Finding a competent investment manager and identifying funds with long-term performance advantages is not easy. Investors need thorough due diligence and evaluation to ensure the selected manager or fund can provide long-term growth potential.

Differences Between Active and Passive Management

Active and passive management are two different investment strategies with distinct approaches and objectives.

Active Management

1. Decision-Making Method: Active management is based on the investment manager or fund manager's proactive decision-making and research analysis to identify opportunities to outperform the market average. Investment managers select individual securities, adjust asset allocations, and time trades to maximize investment returns.
2. Goal: The goal of active management is to achieve returns that outperform the market average. Through market research, stock selection, and timing, investment managers aim to achieve returns that exceed market indices.
3. Management Fees: Active management typically involves higher management fees because it requires investment managers to conduct research, analysis, and decision-making, providing proactive investment strategies and services.
4. Flexibility: Active management offers greater flexibility. Investment managers can make investment decisions based on market conditions and the characteristics of individual securities. They can flexibly adjust asset allocations and trading strategies to adapt to market changes.

Passive Management

1. Index Replication: Passive management invests by tracking the performance of a specific market index, such as a stock or bond index. The construction and adjustment of the portfolio are based on the weights and components of the market index, aiming to stay consistent with the tracked index.
2. Goal: The goal of passive management is to track market performance and achieve returns similar to the market index. It doesn't seek to outperform the market but aims to capture market returns by replicating market performance.
3. Management Fees: Passive management typically has lower management fees because it doesn't require significant research and analysis and only needs to track indices and make portfolio adjustments.
4. Low Trading Frequency: Passive management has a low trading frequency because it mainly adjusts based on changes in the market index rather than individual security research and selection.

A common form of passive management is index funds, which aim to replicate the performance of a specific market index. Passive management is relatively simple in portfolio construction and maintenance, usually suitable for investors seeking overall market performance, low costs, and lower risks.

It is important to note that active and passive management are not mutually exclusive choices but two distinct investment strategies. Each strategy has its applicable scenarios and advantages. Investors should choose the management approach that suits their investment goals, risk preferences, and time commitment. Some investors also combine active and passive management, using a hybrid strategy to balance the benefits of active decision-making and market tracking.