What is 'Active Management'

Active management is the use of a human element, such as a single manager, co-managers or a team of managers, to actively manage a fund's portfolio. Active managers rely on analytical research, forecasts, and their own judgment and experience in making investment decisions on what securities to buy, hold and sell. The opposite of active management is passive management, better known as "indexing.”

BREAKING DOWN 'Active Management'

Investors who believe in active management do not follow the efficient market hypothesis. They believe it is possible to profit from the stock market through any number of strategies that aim to identify mispriced securities. Investment companies and fund sponsors believe it's possible to outperform the market and employ professional investment managers to manage one or more of the company's mutual funds. David Einhorn, founder and president of Greenlight Capital, is an example of a well-known active fund manager.

Objective of Active Management

Active management seeks to produce better returns than those of passively managed index funds. For example, a large cap stock fund manager attempts to beat the performance of the Standard & Poor's 500 index. Unfortunately, for a large majority of active managers, this has been difficult to achieve. This phenomenon is simply a reflection of how hard it is, no matter how talented the manager, to beat the market. Actively managed funds typically have higher fees than passively managed funds.

Advantages of Active Management

A fund manager’s expertise, experience, skill and judgement is being utilized when investing in an actively managed fund. For example, a fund manager may have extensive experience in the automotive industry, so as a result, the fund may be able to beat benchmark returns by investing in a select group of car-related stocks that the manager believes are undervalued. Active fund managers have flexibility. There is typically freedom in the stock selection process as performance is not tracked to an index. Actively managed funds allow for benefits in tax management. The ability to buy and sell when deemed necessary makes it possible to offset losing investments with wining investments.

Active Management and Risk

By not being compelled to follow specific benchmarks, active fund managers can manage risk more proficiently. For example, a global banking exchange-traded fund (ETF) may be required to hold a specific number of British banks; the fund is likely to have significantly decreased in value following the shock Brexit result in 2016. Alternatively, an actively managed global banking fund has the ability to reduce or terminate exposure to British banks due to heightened levels of risk. Active managers can also mitigate risk by using various hedging strategies such as short selling and using derivatives to protect portfolios.

RELATED TERMS
  1. Management Fee

    Management fees are the price charged by a fund manager to invest ...
  2. Active Index Fund

    Active index funds track an index fund with an additional layer ...
  3. Passive Management

    Passive management refers to index- and exchange-traded funds ...
  4. Managed Account

    A managed account is customized to the needs of the individual ...
  5. Investment Management

    Investment management is a generic term that most commonly refers ...
  6. Index Hugger

    A managed mutual fund that tends to perform much like a benchmark ...
Related Articles
  1. Investing

    How to Determine the Best Investment Strategy for You

    Before choosing passive or active investing for your portfolio, understand the differences.
  2. Investing

    Active Share Measures Active Management

    Active Share determines the extent of active management being employed by mutual fund managers.
  3. Investing

    4 Reasons Most ETFs are Passively Managed

    Find out the top four reasons most ETFs are passively managed, including the benefits of lower costs, greater tax efficiency and low asset turnover.
  4. Investing

    4 Reasons Why Fund Managers Prefer Individual Stocks (BRK-A, VOO)

    Learn about some of the reasons why fund managers prefer trading in individual stocks over index funds, despite their overall cost savings.
  5. Investing

    Want ETFs But Hate To Buy And Hold? Try Active ETFs

    Choosing between passive and active ETFs depends on your beliefs about active management's value.
  6. Investing

    Choose a Fund With a Winning Manager

    We break down key components of analyzing a fund manager's performance so you can find a winner.
  7. Investing

    Should You Follow Your Fund Manager?

    Learn how to tell if a fund in flux is still a suitable investment.
  8. Financial Advisor

    Passive vs. Active Management: Which is Best?

    Portfolio performance is as much about picking asset classes as picking stocks. Timing the market, however, is something else altogether.
  9. Investing

    Why Its Sunset for Wall Street's Stock Pickers (JNS)

    Investors are abandoning actively managed mutual funds, hedge funds, ETFs and other vehicles at an accelerating rate in favor of passive funds
RELATED FAQS
  1. Can I Find Out a Manager's Stake in a Mutual Fund?

    Sometimes mutual fund investors want to know how much a fund's management has invested in it. Read Answer >>
  2. Should I invest in ETFs or index funds?

    Learn advantages to investing in exchange-traded funds, or ETFs, and index funds, and decide whether to include them in your ... Read Answer >>
Hot Definitions
  1. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  2. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  3. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  4. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  6. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
Trading Center