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Characteristics and Objectives of Active Portfolio Management


Characteristics and Objectives of Active Portfolio Management

To truly understand what active portfolio management means, it helps to first understand the alternative: passive investing. A passive approach to investing consists of first, using index funds to choose an asset allocation that has historically achieved a desirable outcome, and second, not changing that allocation in response to market conditions or portfolio performance. In general, the truly passive investor believes the future will develop similarly to the past, and market prices are too efficient to be exploited by long-term investors.

Active portfolio management is different. An active portfolio management approach does not place unwavering trust in the historical performance of assets. Instead, the active manager periodically adjusts a portfolio in response to changing market conditions, believing desired outcomes can be more consistently achieved through vigilant risk management.

There are many forms of active portfolio management. In their attempt to exploit market inefficiencies, active managers can use either asset allocation or security selection, or both. Asset allocation refers to a portfolio’s exposure to different asset classes, e.g. equities, fixed income, commodities, or cash. Security selection goes one level deeper – using a careful analysis to choose specific securities within an asset class (Apple vs. Microsoft). Active portfolio management can also vary through a manager’s desired holding period. Time horizons can vary from several years to only a few minutes. Of course, some strategies will be successful, while others are destined to fail. A certain level of expertise is a requirement of, but does not guarantee, long-term success.

At Mader Shannon, the goal of active portfolio management is to protect clients from major downtrends, while still allowing investors the opportunity to participate fully in the growth that equity markets have historically provided.

For more information about active portfolio management with Mader Shannon, call (816) 751-0585.