Active management is the practice of attempting to outperform the market with selection and timing.
Active management is a thoughtful and time-consuming approach to investing and is the opposite of Passive management. Active managers seek to outperform the benchmarks for their portfolio by researching and selecting stocks and other assets based on strategies and analysis methods thought to be superior.
Active managers compete now with passive investment strategies and robo-advising, both of which use their lower fees as the main selling point. Although active managers do have periods where they have historically outperformed their indexes and benchmarks, these numbers take a big hit when fees are factored into the calculations.
Every six months, a SPIVA scorecard is published by S&P which compares active returns to passive index returns. The returns and volatility that equal a benchmark is known as “beta”.
Returns in excess of the benchmark are known as “alpha,” and generating alpha is the goal of active management.