Active Management - Advantages of Active Management

Advantages of Active Management

The primary attraction of active management is that it allows selection of a variety of investments instead of investing in the market as a whole. Investors may have a variety of motivations for following such a strategy:

• They may be skeptical of the efficient-market hypothesis, or believe that some market segments are less efficient in creating profits than others.
• They may want to manage volatility by investing in less-risky, high-quality companies rather than in the market as a whole, even at the cost of slightly lower returns.
• Conversely, some investors may want to take on additional risk in exchange for the opportunity of obtaining higher-than-market returns.
• Investments that are not highly correlated to the market are useful as a portfolio diversifier and may reduce overall portfolio volatility.
• Some investors may wish to follow a strategy that avoids or underweights certain industries compared to the market as a whole, and may find an actively-managed fund more in line with their particular investment goals. (For instance, an employee of a high-technology growth company who receives company stock or stock options as a benefit might prefer not to have additional funds invested in the same industry.)

Several of the actively-managed mutual funds with strong long-term records invest in value stocks. Passively-managed funds that track broad market indices such as the S&P 500 have money invested in all the securities in that index i.e. both growth and value stocks.

The use of managed funds in certain emerging markets has been recommended by Burton Malkiel, a proponent of the efficient market theory who normally considers index funds to be superior to active management in developed markets.