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Active Management

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Active management is the investment process through which the manager of an investment fund seeks and selects financial assets based on its own criteria and analysis, with the objective of achieving higher returns than those of the market. It's the opposite of passive management.

This type of management requires a manager with great capacity for analysis, high market knowledge and experience. Its main objective is to find investment opportunities that can generate higher returns than those of the market. This investment process therefore needs more dedication and time than passive management.

Managers of active management funds buy and sell assets based on their market expectations, changing when they think the portfolio composition is convenient. Always with the objective of maximizing your profitability and / or minimizing your risks. Unlike passive management funds, in which managers don't change the shares in which they invest nor their weight. Unless, of course, the reference index modifies its composition.

Active managers, although they don't try to replicate an index as in passive management, do use one to measure their performance and try to overcome it. It's used for both equities and fixed income.

Advantages of active management

These are the main advantages of active management:

- Interest alignment: Managers will strive to consistently achieve higher returns than the market to meet the interests of their investors. They can minimize losses at times of stock market crash if the management is adequate.
- High monitoring: There is a high control of investments by the manager. Therefore, if an unexpected event arises, the capacity and speed of reaction is high.

Disadvantages of active management

These are the main disadvantages of active management:

- Higher commissions: Due to the great demand that has the manager, commissions of such investment vehicles often have higher charges than other more passive management.
- Risk of poor results: It's possible that the manager doesn't achieve profitability higher than those of the market. In this case we would be paying higher commissions for nothing.

Types of active management

Although there are many types of active management, the best known and used strategies are:

- Top-down analysis (from top to bottom): The criteria for selecting assets begins by performing a macroeconomic analysis. That is, the manager will consider which countries or economies can grow more or generate better returns. Later, he will try to foresee which sectors of these economies can do better. Within these sectors, active managers will choose those companies that they think will bring greater benefits to the fund. This type of analysis is the most commonly carried out in practice.
- Bottom-up analysis (bottom-up): It's just the opposite of the previous case. The active managers will look for those companies which they consider will grow more in the market, regardless of the sectors or countries, as well as in the economic cycle where they are located, given the great universe of companies that exist in the market, and that are susceptible to be analyzed by managers, the task increases exponentially in difficulty. That's why this type of analysis is used less in practice than the Top-Down mentioned above.

Active management in practice

When investing in an actively managed investment fund, it should be taken into account that there is a possibility that the returns obtained may not exceed those of the market. Therefore, before deciding to select a specific fund, it's advisable to carry out a historical analysis. That is, see how the fund has acted in the past and if the manager has had the ability to outperform the market. Although this doesn't assure us that the manager will continue to outperform the market in the future.


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