Active Management

Active management seeks to beat the market at higher cost and lower statistical probability of success. Compare your portfolio against the benchmark in Index Balance.

Definition

Active management is the investment strategy in which a professional manager makes deliberate decisions about which assets to buy, hold, or sell, with the goal of outperforming a benchmark index. Active managers analyse companies, sectors, and macroeconomic conditions to try to identify undervalued assets or anticipate market movements.

The cost of active management is significantly higher than passive: active funds typically have TERs of 1-2% annually, compared to 0.05-0.30% for index funds. Additionally, high portfolio turnover (frequent buying and selling of securities) generates additional transaction costs and tax drag.

The reason why most well-informed individual investors prefer passive management is statistical: studies show that fewer than 15% of active funds outperform their benchmark over 15-year periods, and predicting in advance which funds will be the winners is practically impossible.

Practical example

An active global equity fund with a 1.8% TER needs to generate at least 1.8% more gross return than the MSCI World each year just to match it net of fees. If the MSCI World generates 8% gross, the fund needs 9.8% gross to break even. Only about one in six manages this sustainably.