Active management: Other considerations
A well designed active management effort can create value through performance, but there are also additional reasons to consider active management.
Risk management and market insight
Many investors, whether as individuals or institutions, rely on active managers to provide an overview of the market and to share insights that are relevant to their investment goals. These insights are often quite useful because truly active managers typically have both the incentives and business models to devote significant resources to learning about and understanding the market. Insofar as this is the case, active management fees actually comprise a bundle; part is for fund management and part is for consulting/education. Indeed, a notable trend among institutional investors is to rely more heavily on their best active managers to provide insights into asset allocation and overall portfolio management because these managers are often best positioned to do so.
The landscape for active management
Perceptions toward risk change over time and as they do, the relative attractiveness of active management also changes. For example, during periods when high returns are expected from stocks passive investing provides cheap and easy exposure. However, when low returns are expected from stocks those returns may be insufficient to meet investment goals. In such environments, the relative attractiveness of active investing is higher because it can increase the chance of realizing high enough returns to meet investment goals.
Risk management and market insight
Many investors, whether as individuals or institutions, rely on active managers to provide an overview of the market and to share insights that are relevant to their investment goals. These insights are often quite useful because truly active managers typically have both the incentives and business models to devote significant resources to learning about and understanding the market. Insofar as this is the case, active management fees actually comprise a bundle; part is for fund management and part is for consulting/education. Indeed, a notable trend among institutional investors is to rely more heavily on their best active managers to provide insights into asset allocation and overall portfolio management because these managers are often best positioned to do so.
The landscape for active management
Perceptions toward risk change over time and as they do, the relative attractiveness of active management also changes. For example, during periods when high returns are expected from stocks passive investing provides cheap and easy exposure. However, when low returns are expected from stocks those returns may be insufficient to meet investment goals. In such environments, the relative attractiveness of active investing is higher because it can increase the chance of realizing high enough returns to meet investment goals.
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