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Active Management

Discussion in 'Investing Glossary' started by Glossary, 12th Sep, 2006.

  1. Glossary

    Glossary Active Member

    12th Sep, 2006

    This is a style of investment where the investment manager deliberately buys and sells investment assets in proportions which differ from a set benchmark or index. The active manager will be underweight or overweight particular assets or classes of assets depending upon their view of where the best returns are to be made.

    Active management should be compared with Passive Management (sometimes known as index tracking).

    Within active investment management there are numerous different styles. Some key styles include:

    • Growth - where the focus is on those shares which offer the greatest potential for capital gains through earnings growth which is reflected in a rising share price.
    • Value - the manager attempts to identify those shares which seem to be "undervalued" compared with the manager's valuation calculations. Generally such stocks will have lower PE ratio and higher dividend yield. The aim is to by the shares whilst they're undervalued before the broader market recognises the undervalue and reprices the shares accordingly.
    • Growth at Reasonable Price or GARP - the world according to such managers is to just select good companies at fair prices with the aim of getting returns from holding such quality companies.
    • Top down - the investment manager starts from a big picture "helicopter" view of macro economic factors to narrow down the asset allocation and sectors which they believe will best perform over the investment period. The aim is to outperform by looking at big trends.
    • Bottom up - the classic stock picker. Bottom up management involves lots of analysis of each potential company considered for inclusion in the portfolio.

    Of course these classifications are somewhat arbitrary and a manager may mix and match different approaches or indeed be style neutral.

    See also:
    Last edited by a moderator: 30th Sep, 2006