Active management is an investment approach where the investor selects the investments that make up the portfolio. It is often compared to passive management or index investing, where the portfolio is designed to match the performance of a market index. Active management provides investors with the potential to earn higher returns, as active investors can have expertise that enables them to select investments that do better than the market as a whole. Active management is more flexible than passive management, which has multiple benefits for investors.
Advantages of active management include:
- Expertise: Active management allows investors to leverage the expertise, experience, and judgment of a professional money manager or team of professionals.
- Higher returns: Active management seeks returns that exceed the performance of the overall markets, to manage risk, increase income, or achieve other investor goals.
- Flexibility: Active management enables investors to align their portfolios with their mission-based goals, such as emphasizing companies with a lower carbon footprint or that follow certain practices with regard to diversity, equity, and inclusion.
Disadvantages of active management include:
- Lower investment returns: Investment returns may be lower rather than higher.
- Higher costs: Active management is generally more expensive than passive management due to the resources needed to evaluate investments and determine whether they should be bought or sold.
- Less tax-efficient: Active management is often less tax-efficient than passive management, because it may buy and sell investments more frequently and generate capital gains as a result.
Active management is used in all aspects of investing, including security selection, asset allocation, and sustainability analysis. Active management plays an important role in maintaining market efficiency through the buying and selling of investments, which establishes the market prices for securities.
