2023 Outlook – Active Management in 2023: Why Investors Should Consider Working with Asset Management Companies and their in-house Portfolio Managers
The opportunity in active management for investors
While active management has remained a popular investment strategy, involving the selection of individual stocks or bonds to outperform market benchmarks, passive investing has increased in popularity, driven mostly by lower fees, rather than genuine alpha production (or the ability to beat the benchmark).
However, unlike passive investing, where investors simply buy and hold a diversified portfolio of securities usually benchmarked to a predetermined index, , active management requires a hands-on approach and a constant monitoring of market trends and economic developments by real people, rather than machines. While passive investing has been gaining popularity in recent years, active management still presents a lucrative opportunity for investors who are willing to put in the time and effort to identify promising investment opportunities.
Where actively managed funds differentiated themselves from passives in 2022 was through diversification against the benchmark, generally with more concentrated portfolios which focus on companies that are undervalued and, therefore, underappreciated by the market. .
Asset management companies with portfolio managers are firms that specialise in active management. They have a team of experts who constantly monitor market trends and economic developments, and leverage their expertise, research, and analysis to identify stocks or bonds that are undervalued or overlooked by the market. These firms can offer investors several advantages over managing their portfolios independently.
Fundamental research allows skilled active managers to trim and eliminate overpriced securities from the portfolio whilst allowing them to identify under-priced, under-valued opportunities. This, in theory, allows active managers to outperform the index over market cycles with significantly less volatility.
The fund managers at CRUX use a bottom-up, stock-picking approach. Our managers seek strong potential performance which is not yet reflected in the current share price of individual companies. We believe that these companies will thrive and deliver profit for our investors. Risk management and our wide range of investment opportunities helps minimise risks and maximise returns over the long run.
Overweight vs underweight – what does it mean?
Active managers use their fundamental research to buy securities in the companies they believe will perform and sell securities in those which are underperforming.
When a manager holds a higher proportion of securities in a company than they would if they were simply copying the index, the fund is said to be ‘overweight’ in these securities. Conversely, when the managers hold proportionately fewer securities than the index in the portfolio they are said to be ‘underweight’.
Benefits of active management
- Opportunity for outperformance
Active fund managers aim to beat the index, so they offer the investor the potential to make higher returns than the average ETF or tracker products - Defensive measures
Fund managers anticipate change and are able to react quickly to changing market conditions to minimise potential losses for investors by increasing or decreasing holdings in certain securities
- Research
In-depth research allows managers to identify which specific companies to invest in. It is the quality of this analysis which gives funds the potential to outperform the index
In conclusion, active management in 2023 and beyond presents a lucrative investment opportunity for investors who are willing to work with asset management companies and their portfolio managers. These firms, like CRUX, seek to offer investors access to a wider range of investment opportunities, high quality risk management, and the benefit of their experience and expertise. However, investors should carefully weigh the pros and cons with regards to their own circumstances. The CRUX team is here to help determine your individual opportunities.