The management of investment portfolios is usually classified between active and passive. Active fund management seeks to generate alpha —measure of the performance of an investment portfolio—, which tries to beat the indices by carrying out dynamic portfolio management. To this end, the management team analyzes changes in the economy, market trends, the political landscape and the evolution of companies and sectors.
Passive management, on the other hand, is limited to following certain rules. Channel your investments into the companies that make up an index. And here’s the thing: the more popular a company is and the more its shares appreciate, the more weight it has in the indices and, therefore, the more money it captures from passively managed funds.
This operation, according to many experts, could be fueling stock market trends and excessively high multiples, which would also cause many less popular companies to be listed at steep discounts. Precisely, the best possible scenario for active management.
Passive management fashion
Despite this, indexed or passive management has experienced a huge take-off in recent decades. It can be said that it is fashionable. In 2021, the assets managed under this investment methodology exceeded 20 billion dollars, the equivalent of 16 times the GDP of the Spanish economy. Today, giants specialized in this type of product, such as BlackRock or the Vanguard Group, have become the great kings of the financial industry.
In the United States, even, passive investment has already surpassed active management by volume of managed assets. Among its great advantages is that it is much cheaper products. This is so because passively managed funds do not have large research and analysis teams behind them.
He knows in depth all the sides of the coin.
In those of active management, the management team looks for suitable investment opportunities to move the money. In a passive management fund, on the other hand, this team does not require as many people, because the objective is to replicate the index (buy each of the securities that make it up), and in the same proportion. The immediate consequence: much lower commissions, one of the characteristics that characterize passive investment.
For this reason, experts have traditionally tended to consider passive management funds advisable for the small investor with fair financial knowledge, with little desire or security in their movements and with less time to dedicate to their immediate investments. Now, does this mean that the times of active management have passed? Not necessarily. In fact, more and more analysts point to the opposite. As we have seen, passive management could be creating an enabling environment for managers who actively select their portfolios to achieve extraordinary returns.
If you want to know more about all these issues and find out when it is better to opt for actively managed funds and when for passively managed funds, don’t miss the latest video from if i had knownthe new financial information channel of Mutuactivos.