Despite the growing popularity of passive investment management and the number of arguments in its favor. There are a number of arguments in favor of active portfolio management.
Firstly there is the dispersion in returns of active managers with some being able to beat their Benchmark While others underperform against their Benchmark just because there is some evidence to suggest that the average active manager doesn't outperform after fees does not mean that there aren't any good active managers out there who can beat their benchmarks the challenges in trying to find those good performing managers also despite the academic evidence on underperformance on average after fees many studies. Look at all of the funds within a given area of analysis. This means there is a risk that the data doesn't only include genuinely actively managed funds but also includes closet index funds as well some studies suggest that once these closet index funds are removed the average performance of actively managed funds increases Further studies also suggest that actively managed funds may be able to perform better during certain market conditions such as during recessions or when there is greater dispersion of returns amongst all securities within an index as these times May provide more opportunity for active managers to use their skill.
It is also been suggested that active managers are able to better manage the tax liabilities of the fund and of investors through their timing of transactions while this is not available to passive funds which must rebalance their Holdings to match the Benchmark when The Benchmark itself is rebalanced according to the rules of the index provider.
In addition active managers tend to be more actively engaged with the management of companies that they are invested in as they are able to withdraw their support for the management of the company by selling their funds Holdings of the company stock if they believe the management team are underperforming.
This has an effect on the behavior of the company to engage in activities which are beneficial for the company and its shareholders which promote more efficient allocation of capital across the whole economy.
This is not a threat that passive fund managers hold over companies.
passive managers do have the ability to apply pressure to management teams that they feel are underperforming through engagement with voting activities, but passive funds do not hold the threat of divestment that active funds do finally active managers are making decisions every day as to whether the Assets in their portfolio are overvalued undervalued or fairly valued if many portfolio managers arrive at the same decision that a security is overvalued the selling pressure that will result will lead to a full in the value of that security.
This will move the security closer to its fair value.
This process is referred to as the price Discovery process that leads to a security price being closer to what investors think the security is worth as a whole. This is only driven by the analysis and decisions of active portfolio managers passively managed funds do not contribute to the price Discovery process.
