What is Active Management?
Seeks to outperform a predetermined benchmark over a specified period of time.
What does Active Management employ to help meet is aim?
Fundamental and technical analysis to help it forecast future events.
What 2 approaches are used in Active Management?
- Top-down
- Bottom-up
What is a Top-down approach?
Investment manager focuses on economic and industry trends.
What is a Bottom-up approach?
Investment manager focuses on company-specific indicators, such as net assets, future profitability, cash flow.
What investment styles are included in a Bottom-up approach?
- Growth investing
- Value investing
- Momentum investing
- Contrarian investing
What is Growth investing?
Picking shares that present the opportunity to grow significantly in the long term.
What is Value investing?
Picking shares that are undervalued relative to their present and future profits or cash flows.
What is Momentum investing?
Picking companies whose share price is rising on the basis that this rise will continue.
What is Contrarian investing?
Picking shares that are out of favour and may have ‘hidden’ value.
Where is Passive Management seen?
In investment funds that use Indexation.
What is Indexation?
Constructing a portfolio that tracks the performance of a recognised index.
What assumption does Indexation make?
Securities markets are efficiently priced, therefore cannot be outperformed. Thus, makes no attempt to outperform or forecast future events.
What are the advantages of Indexation?
- Few portfolio managers outperform benchmarked indices.
- Low fund charges.
- Less expensive to run, as lower ratio of staff to funds managed and lower portfolio turnover.
What are the disadvantages of Indexation?
- Indexed portfolio’s may not meet all investors objectives.
- Indexed portfolio’s follow downturn in bear markets.
- Most indices reflect the effect of the value of dividends from constituent equities on the ex-dividend date.
- Performance affected by need to manage cash flows, rebalance portfolio to replicate changing index constituents - leads to Tracking Error.
What’s Tracking Error?
Where portfolio performance does not match that of index.
What is Core-Satellite management?
Investment strategy that uses both active and passive management.
How do you implement Core-Satellite management?
- 70-80% in passive investments, that minimise risk of underperformance (core).
- 30-20% in actively managed funds or securities (satellite).
What are Smart-beta funds?
Active and passive investment funds. They follow an index but take into account other factors, e.g. value/growth, when creating an index they track.
