When it comes to investing, you can take one of two approaches, active or passive fund management. Like people arguing over the iPhone or Android devices, some people can get pretty heated over which is the best approach to take. Over the next two blogs, I am going to look at the pros and cons of each approach and let you make your own mind up on which one to take when you invest your money.
What is Active Fund Management?
Active fund management relies on people to make decisions on where they invest your money. They carry out research, analysis and forecasts on stocks to help them identify where a particular stock may be mispriced with the aim of beating a particular benchmark or index. They will try to make profits by buying these stocks at below market price. Conversely, they will sell stocks they perceive to be overpriced. You are relying on the fund managers experience and skill to make the correct call.
Advantages of Active Fund Management
Why should someone use an active fund manager for their money:
Ability to disinvest in downturns. Active managers can sell stocks as a defensive measure during market crashes and transfer the money to cash (do not confuse this with your typical life company fund where the manager has a mandate to invest in say, European Equities. They cannot just sell all European equities and move to cash).
Complete control over the companies you invest in.
The skill of professional fund managers. They may identify upward trends in a particular industry/ region and invest heavily there to maximise profit.
They can take advantage of other investors irrational behaviour when it comes to investing.
Disadvantages of Active Fund Management
A lot of active fund managers simply don’t try to beat the index. These are called “closet trackers”. Afraid that people will move their money if they aren’t close to the index, they more or less keep to the index even if they don’t believe in holding the stocks they have.
More expensive. There is additional work involved in researching the stocks to be bought and that costs money. With frequent trading, there will be the associated trading costs too.
It is extremely difficult to do it on a consistent basis. The active fund manager’s job is to beat the index every year and they will not be able to do that, no one can.