Definition of Active Management

Active management is widely used in mutual funds, hedge funds, and private investment portfolios across Canada. Portfolio managers analyze market conditions, economic trends, and financial statements to adjust asset allocations dynamically.

For example, if a Canadian mutual fund manager expects energy stocks to rise, they might increase holdings in oil and gas companies while reducing positions in other sectors.

Purpose of Active Management in Investing

Active management is designed to maximize returns and manage risk by adjusting investment strategies based on market conditions. Key objectives include:

1. Outperforming Market Indexes – Generating higher returns than benchmarks like the S&P/TSX Composite Index.
2. Capitalizing on Market Trends – Identifying undervalued assets or sectors before they rise.
3. Risk Management – Adjusting portfolios to minimize exposure to market downturns.
4. Adapting to Economic Changes – Responding to inflation, interest rate changes, and geopolitical risks.
5. Providing Flexibility – Allowing investors to capitalize on short-term and long-term opportunities.

Active Management Strategies

1. Fundamental Analysis

Portfolio managers evaluate financial statements, earnings reports, and industry trends to identify undervalued stocks.

Example: A Canadian fund manager analyzes a company's balance sheet and income statement to determine whether it is a good investment.

2. Technical Analysis

This approach focuses on historical price movements, chart patterns, and trading volume to predict future price trends.

Example: A trader might use moving averages and RSI indicators to time stock purchases and sales.

3. Sector Rotation

Investors shift funds between different sectors based on economic cycles and industry performance.

Example: During an economic recovery, a portfolio manager may increase investments in technology and consumer discretionary stocks.

4. Market Timing

Active managers try to buy low-price assets and sell at high prices based on short-term market trends.

Example: A fund manager may sell stocks before an expected interest rate hike to avoid potential losses.

5. Stock Picking

Active managers select individual stocks they believe will outperform the market rather than investing in a broad index.

Example: A Canadian equity fund might choose Shopify over other tech companies based on revenue growth.

Active vs. Passive Management

Feature	Active Management	Passive Management
Investment Approach	Frequent buying and selling	Holding index-tracking funds
Goal	Outperform the market	Match market returns
Fees	Higher (due to management and trading costs)	Lower (less trading required)
Risk Level	Potentially higher	Generally lower
Example	Actively managed mutual funds	ETFs like the Vanguard S&P 500 ETF

For example, an active fund might buy and sell stocks based on earnings reports, while a passive ETF simply tracks the S&P/TSX Composite Index.

Advantages and Disadvantages of Active Management

Advantages

• Potential for Higher Returns – Skilled managers can outperform the market by identifying strong investment opportunities.
• Risk Mitigation – Active strategies allow managers to exit poor-performing investments before they decline further.
• Adaptability – Active funds adjust portfolios based on economic conditions and emerging trends.

Disadvantages

• Higher Fees – Management fees and trading costs reduce net returns for investors.
• Market Risk – Even skilled managers can underperform benchmarks in volatile markets.
• Difficult to Predict Success – No strategy guarantees consistent outperformance over time.

Related Terms

• Active vs. Passive Investing: Active management involves frequent trading, while passive investing focuses on long-term index tracking.
• Hedge Funds: Actively managed investment funds that use leverage and alternative strategies to maximize returns.
• Expense Ratio: A measure of how much a fund charges investors annually for management fees.

Interesting Fact

Did you know? According to global investment studies, over 70% of actively managed equity funds underperform their benchmarks over a 10-year period.

Statistic

According to Morningstar Canada, only 35% of actively managed funds in Canada outperformed their benchmarks over a five-year period, highlighting the challenge of consistent outperformance.

Frequently Asked Questions (FAQ)

1. Is active management better than passive management?

It depends on investment goals and risk tolerance. Active management can generate higher returns in certain conditions, but passive management often provides lower costs and more consistent returns over time.

2. What types of funds use active management?

Actively managed mutual funds, hedge funds, and private equity funds use active strategies to maximize returns.

3. How much do active management fees cost?

Actively managed funds typically charge 1%–2.5% in management fees, compared to 0.05%–0.50% for passive index funds.

4. Can active management beat the market?

While some active managers outperform benchmarks, studies show that most fail to beat passive strategies over long periods.

5. Is active management suitable for all investors?

Active management is ideal for investors seeking professional management and willing to pay higher fees, but passive investing is often better for long-term, cost-conscious investors.