The aim of an actively managed fund is to beat the return from a particular market index, which is a collection of shares or bonds chosen to represent a particular part of the market, such as the large cap sector of the stock market. Fund managers who use an active approach aim to either outperform a given equity or bond market by using their knowledge and skill to analyze the market. Then they buy shares (equities) that they believe are currently undervalued, and so have potential to quickly appreciate in price to their believed "correct value" - a technique called 'stock picking.' Fund managers can also adjust their portfolios to mitigate potential losses by avoiding certain shares, bonds, sectors, and even countries if they believe those respective values will decline.
Active managers use different styles of investing:
- Value managers seek to buy companies whose shares are currently selling for less than their net asset value or where they feel future earnings potential has been underestimated.
- Growth managers look for companies that have exceptional opportunities to grow, and to increase their share price over the long-term.
Don't Forget The Costs
The returns earned by an actively managed fund will depend not only on the stock-picking ability of the manager, but also the costs of the fund. Higher costs (such as research, and buying and selling securities more often) will affect any extra potential profit that an active manager may seek to provide. The old saying is true: "It's not what the investment earned, it's how much you were able to pocket!"