Active management is an investment strategy where an investment manager makes specific investments in an effort to outperform an investment benchmark or market index, such as the TSX or S&P 500. If you hear of an investor or an investment manager trying to “beat the market” they are using active management to try and obtain better than market-average returns.
When engaging in active management, an investment manager uses analytical research, forecasting, and their own judgement and experience to determine what securities to buy, hold and sell. They hope to take advantage of market inefficiencies and invest in undervalued stocks which will increase in value and in turn, increase the value of a portfolio.
Due to the greater amount of work involved, actively managed funds typically have higher fees and build up more transactions costs than passively managed funds. By some this is seen as a disadvantage of active management, as investment managers need to beat their benchmark plus make up for the higher fees and costs an investor will pay by investing in the fund.