Active Investing

Active investors believe that, through research, analysis and judgment, they can identify investments likely to perform better than the market, or avoid those likely to perform worse. They may pick individual shares, adjust their mix of asset types or time their entry and exit from markets.

Active managers use a wide range of approaches, including fundamental analysis, technical analysis, quantitative models and macroeconomic forecasting. Styles include value, growth, momentum and income investing.

For example, an active fund manager might hold 50 carefully selected companies rather than all 500 in an index, aiming to beat the index by choosing companies they believe are undervalued.

Active investing offers the potential for higher returns and the flexibility to avoid overvalued areas or reduce risk during downturns. But it usually costs more, through higher management fees and trading costs, and many studies show that most active funds fail to outperform their benchmarks consistently over long periods after fees.

Active management may be more successful in less efficient markets, such as smaller companies or emerging markets, where information is less widely analysed. Many investors combine active and passive approaches.