Active management is when an investor or money manager attempts to outperform an index or benchmark, using tactical strategies.
Many economists and financial professionals believe that the markets are efficient. This means that all available financial information has already been built into the prices of securities, and that you cannot outperform the market by making specific selections of stocks, timing the market, reallocating your assets regularly, following the advice of market pundits, or finding the best portfolio managers.
An alternative investment religion is based on the fact that markets will never be completely efficient, because there will always be some information that is either difficult to ascertain or is not widely available.
Emerging markets, small cap stocks, value picks, high yield corporate bonds (“junk bonds”), and highly specialized sectors such as oil and gas industry MLPs are some of the areas in particular that active managers are able to find and exploit price inefficiencies through research and expertise.
There are many detractors from this idea these days, especially as computational power makes index investing a better and better mimic, or low-cost alternative, to active management. Statistics which detract from this idea typically use the average performance of active managers instead of the best ones, and attempt to show any wins they experience over the index are not going to persist for long.
Remember, though, that the gains from that period can be rebalanced elsewhere or invested in another active management fund that is well-positioned based on the current conditions.
The investor bears the burden of monitoring the management and making independent choices that maintain diversification. You can be your own judge, but ultimately a mixture of active and passive strategies is probably going to serve you well.
At Tickeron, we advocate in favor of active management and will help you find actively managers that are likely to serve you well.
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