Active Versus Indexed Managers
When choosing a manager, investors can select a manager that makes active investment decisions (an “active” manager), or one that seeks to track an index (an “index” or “passive” manager).
What does an active manager do?
An active manager aims to outperform the market by delivering a higher return than the market benchmark index. For example, a NZ share manager may have the objective of outperforming the S&P/NZX 50 Index Gross. Managers do this by researching investments and choosing those that they expect to deliver superior returns.
What does an index manager do?
An index manager aims to track the performance of the market by delivering a return that matches the benchmark. Index managers do this by investing in the market as a whole without trying to pick winners.
What is a benchmark return?
A benchmark return is the average return of the market. The return is calculated independently, based on a well documented formula. The performance of an investment manager is normally compared to the return of a relevant benchmark.
When are the advantages and disadvantages of an active manager?
The principal advantage of active management is its potential to deliver returns that are superior to the market.
There are two disadvantages. Firstly, returns may be inferior to the market. Secondly, active managers normally charge significantly higher management fees than index managers.
When might an active manager be better?
An active manager may be preferred in markets that are not well researched, or where asset prices are less likely to reflect their fair value. The investor also needs to have confidence in the ability of the manager to outperform.
When might an index manager be better?
An index manager may be preferred in markets that are well researched, so that asset prices are more likely to reflect their fair value. An index manager is likely to be preferred when an investor has less confidence in the ability of active managers to outperform, and when management fee savings are significant.
What is the best way to choose between an active manager and index manager?
Trust Management recommends a research based approach to choosing a manager. The consistency of performance, the investment process, the quality of the investment personnel and the level of management fees are all important inputs when choosing a manager.
Want to know more?
Trust Management provides advice to charities on managing their investment portfolios and choosing appropriate investment managers for each asset class.
If you have any questions, or would like to know more about choosing a manager, please do not hesitate to contact John Williams on (09) 550 4046.