Active management is an approach to investing. In an actively managed portfolio of investments, the investor selects the investments that make up the portfolio. Active management is often compared to passive management or index investing.
Active investors use several different techniques to choose investments. The two most common techniques are:
- Fundamental research. Some active investors make their selections by using research on the characteristics of individual investments to evaluate their risk and potential return.
- Quantitative investing. Some active investors define a systematic process to select investments using data about the individual investment.
When selecting investments, active managers may also consider how an individual investment will affect the characteristics of the portfolio as whole.
Active management is used in all aspects of investing. For example, an investor can use active management for:
- Security selection. Selecting stocks, bonds, or other investments.
- Asset allocation. Active management can help determine the allocation of portfolio assets among cash, bonds, stocks, real estate, and other asset categories.
- Sustainability analysis. Active management is an essential element in the assessment of environmental, social, and governance factors.
Active management is the dominant approach to investing.
This short video from the Active Managers Council explains the foundation of active management and the differences between active and passive, highlighting how active management can benefit investors at-large.