When investing in the markets, there are two main styles of portfolio management, active and passive.  With our investment philosophy as the basis for our planning and product selection, we believe one style offers benefits over the other.  But, because we believe in transparency and educating our clients, we want you to understand both styles so that you can make a truly informed decision.

Active Management

Active management involves speculating on when to buy and sell (timing), and what to buy and sell (selection).  Active management can take place within the individual product management, with the overall portfolio manager, and with the investor's advisor.  Active management involves speculation, and requires the manager to not only get the individual security or asset class correct, but to also get the timing correct.  Active management may rely on research, forecasts, and the manager's own judgement in making the investment decision.  The objective of active management is to produce better returns than the market or index that is used as the manager's benchmark.  Unfortunately, academic research indicates that is extremely difficult to produce better returns than the benchmark with consistency.

Passive Management

Passive management has two subsets, index investing (indexing) and asset class investing.  With indexing, the objective is to track a market index, such as the S&P500, and minimize the differences between the index and the product (tracking error).  There is no speculation involved, and there are many indexes that can be tracked.  You cannot invest directly into an index, so you have to use a product that replicates the desired strategy.  These products have fees, although these fees are generally lower than with active management.  The downside of index investing is that it allows a commercial index to determine the investment strategy.  Any changes in the index that is being tracked means the investment must buy or sell at the same time to avoid tracking error. 

Asset class investing involves the use of academic principles to categorize securities based on their underlying characteristics vs. what index they are associated with.  Portfolios are than structured based on risk and along dimensions of expected returns.  Asset class investing does not really look at individual stock names, but looks at the characteristics of those stocks.  Also, asset class investing purchases the vast majority of publicly traded companies, and the portfolio is weighted toward areas of higher expected returns.

Passive management generally has lower operating expenses, and lower turnover.  It also removes timing and selection risk, and generally has lower tax implications for taxable accounts.  On our page SPIVA & Persistency, there are links to research papers on the shortfalls of active management, and how past performance does not dictate future results.

 

Please note: Investing involves risk, and neither type of investment management can guarantee returns.  Whenever you are investing in the markets, your account value can and will fluctuate.  Please read your prospectuses and learn as much as you can about how your portfolio operates.