Last month, this article (http://www.richardcayne.com/richard-cayne-meyer/active-or-passive-does-it-really-need-to-be-eitheror/ ) discussed the general differences between active and passive investing. Now, it may seem to many that active investment management offers more risks (and fees) than rewards, but there are situations where it may be the best option.
Richard Cayne of Meyer International believes that there are certain sectors and circumstances that require the in-depth attention that passive investing lacks. Active management is needed when there are a vast range of variables or not enough information readily available.
Is being active a good thing?
One would think that the onslaught of available corporate information would be a boon to investors, as with the increased access to high speed connectivity and trading platforms and software. Now, almost anyone who wants to be involved in day to day (or second to second) trading, can.
But it takes more than instantly acting on a hunch or hoping for the best to be a successful active investor. And while there are infinite ways to slice and dice statistics (and there are so many tools out there claiming to be the best for analysing financial performance) to presumably decrease any guesswork, comparing numbers alone has its pitfalls. Patterns can be pretty to look at, but they don’t necessarily indicate future gains.
Active management requires a more hands-on approach – a more methodical analysis. You may think this is counter-intuitive since the market appears to move quickly, but this isn’t a tennis match. Most of us are investing for the long term, so we can’t always rely on quick scores. Active managers pick their battles and remain disciplined in their focus, avoiding the distractions of momentary increments.
Trends for active actions
Active management can be applied to the full range of investing. It offers greater flexibility than passive management as it’s not constrained by specific requirements (e.g. S&P500 or healthcare companies), so holdings can be changed more fluidly. There is more reliance on the manager to make wise decisions such as when to hedge against loss, when to bail out of a sector or a company, or when to reassess overall strategies.
Certain companies, sectors, and indicators combine to create its own fluid situation that require more active attention. Well-established blue chip stocks that have known track records and behaviours may not need extra scrutiny of an active investor, but a new player or lesser known market may.
With myriad investment opportunities globally, having an active manager researching and analysing picks may be a better option than trying to keep up with all the developments yourself. Emerging markets often don’t have the same disclosure requirements (or are not available in your language) and new technologies may have a steep learning curve.
And, added to the mix are the political and economic events and potential events worldwide that will invariably affect the financial markets.
These are just a few variables that could shift fortunes. How to decide what to focus on and when requires keen, studied experience.
Make sure you’re getting what you pay for
Active management requires more involvement, hence the higher fees, but this doesn’t mean you should immediately avoid going this route. Look for a long track record of excellent performance to ensure that skill, not luck, is the source.
“To achieve a level of quality, sometimes you must be willing to pay a premium,” advises Richard. “Obviously, you don’t want to waste your hard-earned money, but to get your money to earn more for you, an excellent active investment manager may be well worth those added fees.”