Active Investing is generally defined as an approach which proactively chooses specific assets and allocations. Unlike, passive investing, Proactive Management relies on some degree on market timing considerations. It also evaluates and re-evaluates securities for the portfolio mix.
Value oriented mutual funds are a practical example of active investing. Securities which are believed to have value relative to other issues are purchased while stocks which appear to have more than amply discounted future economic prospects are reduced or liquidated from the portfolio holdings.
Other active investment funds include:
- Adjustable duration or maturity bond funds
- Emerging Markets Funds which permit cross-border allocations
- Growth Funds
- Income Funds
- Quantitative Funds
- Special Situations Funds
- Technology Funds
Decision making may be quite broad. It is perceived that this flexible discretionary framework can add value to a portfolio by weeding out potential laggards and focusing on the more promising situations.
Privately managed funds may be more sensitive to individual needs. Among these can be trading decisions made with tax efficiency as a criterion.
Proactive investing is often compared to passive indices for performance evaluations. For example, a yield or return pickup would usually be expected from an active manager relative to a passive fund.
However, investment comparisons can be difficult particularly over short time horizons. This is partially due to the fact that some industry groups may perform better at different times of economic cycles.
Also, comparisons between large and small caps become murky because the successful small caps are removed from the small cap index and entered into the large cap index.
While this bias can be mitigated it requires sophisticated analytical procedures.
Some degree of active asset management is useful to adapt investment holdings to lifestyle requirements.
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