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Actively managed funds are aimed at investors who are happy to trust a fund manager to pursue returns using their expertise to try and outperform the market – the aim being to consistently outperform a relative index or benchmark.
Most such funds tend to have a free mandate in aiming to achieve this out-performance and many focus on absolute returns.
Globally, active management is a mainstay of asset management activities. Rather than following the ups and downs of indices or benchmarks, this type of management focuses on enabling investors to take advantage of different types of investment styles – such as pure stockpicking, contrarian investing, or growth versus value investing – in the process making it easier for investors and their financial advisers to find the right funds that meet the investment objectives being targeted. All active managers, though, will be trying to achieve good alpha and information ratio scores, as well as other measures of their skills in being able to outperform their peers and add value to the portfolios they manage.
Active management is not just about the fund managers, however; equally important is to understand the environment they work in, as managers may need to rely on information and support from analysts, particularly if looking to buy assets outside the market where they are based. For example, a manager based in London may require analysts to do some initial research into a company based in South America before deciding whether to add that company to their portfolio of holdings. Subsequently, active managers will often spend considerable time meeting the management of companies in which they invest, either on the road or via meetings in their own headquarters.
Active management requires more input from the fund management group than passive management, and involves the use of skilled fund managers. Both factors contribute to making actively managed funds more costly than passively managed ones.
Investors are meant to benefit from this setup as the lead managers on such funds tend to be the more capable ones with asset management groups, and work in the knowledge that they are under additional scrutiny because of the promise of higher returns paid for by higher cost.
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