Portfolio Management
What is Active Management?
Active management is a disciplined investment process in which portfolio managers analyze, buy and sell securities such as stocks or bonds based on the investment fund’s objective. The managers seek to invest in quality securities that offer greater investment potential than the overall market.
The Benefits of Active Management
We believe active investment management adds significant value and benefits to investors. Active management is one of two basic approaches to investing. The other alternative is passive management, also known as indexing. Investors pay fees and expenses with both options.
What is Indexing?
Indexing is an investment strategy which seeks to match the performance of a benchmark index by buying and holding all of the investments, and in the same proportion, as the index, or by investing in a representative sample of the securities in the index. You cannot invest directly in an index. Portfolio managers of index-based investments do not perform analysis of stocks or bonds or market conditions. Investments such as exchange-traded funds (ETFs) and index-based mutual funds provide exposure to the holdings of an index. An ETF with the trading symbol SPY, for example, attempts to match the returns and composition of the S&P 500 Index.
Why there is a difference in fees for active management and indexing?
Generally speaking, investment management fees for actively managed funds are higher than for index funds. This is to pay for the investment professionals who analyze stocks and bonds and market conditions for the fund. To provide downside protection, reduce volatility and minimize investment risk, active managers can avoid investments or areas of the market that have become overvalued.
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Downside Protection
Most investors will recall how the bear market of 2008 – 2009 raised their sensitivity to downside protection. Investors who use active management can benefit from downside protection during periods of market weakness. Active managers can take steps to protect the assets of the fund by switching to safer investments such as cash. In contrast, the indexing mandate offers no flexibility and is to be fully invested at all times.
