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Because of the mandates involved, managers may rely on a range of investment strategies to generate returns.
Many active fund managers take a bottom-up high conviction stock picking approach. This means the manager has a firm view on where they think the value lies in any particular stock at any given point in time.
The flip-side is that this can lead managers to have higher turnovers in their portfolios, and become somewhat dependent on market timing – deciding when to buy or sell their holdings.
Contrast this with the activities of passive managers who buy and hold portfolios that are designed to replicate the market, or portions of it. This means that a manager running a FTSE 100 passive fund would only change their holdings when the FTSE itself reviews and changes the constituents of its various indices.
It should be noted, however, that higher turnover by active managers does not imply poorer outcomes for investors. And it is also the case that some active managers buy and hold key stocks for longer periods than others, for example, because they are interested in total returns, including dividends and not just share price rises or falls.
Actively managed funds thus allow for good comparison between lead fund managers at different asset management groups, as it is their styles and views that, ultimately, are responsible for the performance.
This makes it easier to judge the true worth and merits of such managers. It also allows for a measure against the general argument put forward that investors should not settle for the returns from passively managed funds when they could get more by seeking out the better performing active managers in the industry.
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