The success of any companies can be identified by the quality of management. To achieve the company goal of maximising the profit and overall turnover, the use of investment strategy is very essential. The Active Fund management strategy and the Passive Fund management strategies are the two basic investment strategies implemented by the managers. There is no clear answer to which one is better than the other, it depends on what the managers of the company prefer to use. This paper will try to evaluate these strategies to find their merits and flaws and conclude which strategy might perform better.
Active funds and passive funds are also known as managed funds and index funds respectively (Loth, n.d.). The managers using the active fund strategy will try to out-perform the stock market average whereas the passive fund managers do not try to do it. The active fund managers tend to research and analyse different market trends and keep track of any changes that might influence the company (INVESTOPEDIA, 2017). This helps them to make any financial decisions such as buying and selling of assets at the right time to maximise the return that will try to beat the market average. The manager who uses the passive fund strategy try to stay on the same level as the market index that they follow and copy all the investment decision of that index (INVESTOPEDIA, 2017).
Both active and passive fund strategies are widely used by the managers to make the best financial decision for the company. As the active fund managers are always trying to beat the market, they are well trained, experienced and can have a history of providing excellent results (Loth, n.d.). However, the managers cannot always perform better than the market (Bernardo K. Pagnoncelli, 2017), everyone has their ups and downs. The profit they generate can tend to be higher compared with the passive fund managers’, however, to get those high profits, the managers might have to take projects with higher risk also must convince the investors to invest in them. The managers analyse the market risk and consider the future forecasts before deciding if the risk is worth taking. Due to their experience and expertise, they can also charge a higher fee. Expert level managers generally tend to avoid trying new process and believe their fundamental strategy is the best which can hinder the further improvement of the results (Loth, n.d.). Research done over a period shows that the preferred strategy has shifted from active to passive (Mitchell Miller, 2011). Cost can be one of the factors; while implementing the passive fund strategy, the manpower needed is significantly lower than the active fund strategy as not much research is needed and the manager does not need to make any major investment decisions. They can just invest in a selection of stock from the index they are tracking. As this strategy mirrors the index, it is like a double edge sword; when the index value increases, the fund value follows, similarly when the value decreases so does the fund.
After doing some studies, the author (Mitchell Miller, 2011), highlights the point that the active fund managers failed to provide significantly higher risk-adjusted returns to the investors compared to the passive fund managers, deflecting their initial hypothesis of active fund strategy outperforming the passive fund strategy. Other research also stated that passive fund strategy is better in a rapidly growing market because of the mirroring aspect of this strategy, however this strategy is out-performed by the active fund strategy where the market is failing as they can manage the market risk and protect their capital, therefore, suggested the idea of the hybrid investment strategy to be the best option. The hybrid investment strategy is also supported by (Bernardo K. Pagnoncelli, 2017) for a pension funds where they planned to use profile optimization as the first step followed by the index fund strategy.
Among the many articles about the active and passive investment fund strategies, some authors suggested the active investment fund strategies to be better while the others supported the passive investment fund strategy. Few suggestions for the use hybrid investment strategies were also presented.