Kingdom Capital Management highlights the benefits of Active versus Passive Management.
Choosing among investment options starts with a well-known fundamental concern: the desire to generate the greatest return while taking on the least amount of risk to achieve the expected return. Investment return and risk tolerance vary based on institutional mandates, individual/family financial goals, and other factors. The investment process starts by weighing the investment choices available in the market. Today, there are more investment options than ever before; at a high level, the choices usually begin with a decision to hold passive investments, active ones, or both.
Passive management, also known as simply “buy-and-hold,” is synonymous with index fund investing. This means the performance of a portfolio is designed to parallel the returns of a particular market index, such as the S&P 500. By contrast, active management usually—but not always—involves more frequent trades and portfolio adjustments, with the intent of outperforming a particular market index. With an actively managed investment fund or portfolio, you allow a portfolio manager, co-managers, or a team of managers to make investment decisions on your behalf. The success of the portfolio relies on the expertise and skill of the manager(s).
The Advantages of Active Management
Active management helps investors improve on risk-adjusted returns. It also helps investors gain exposure to more investment opportunities that aim to achieve high returns otherwise unreachable through passive management. This widens the investment universe, as participants have greater flexibility in their investment choices. Research has shown that various active management styles have performed well during periods of market uncertainty compared to passive management, which does not make portfolio adjustments during market declines. An active management approach better serves investors looking to compound high rates of return over time and certain institutions whose mandates require their funds to earn a minimum rate as consistently as possible.
Moreover, with active management, you increase your probability of finding the best investment opportunities; subsequently, you can take advantage of market trends and dislocations to increase your portfolio’s performance. This added flexibility is not available with passive management, as it relies on a static portfolio designed to mirror an index. Further, with actively managed strategies, it is possible to take advantage of certain tax credits and opportunities in the event of losses, should any occur. You can even make use of various investment instruments to boost the tax-exempt income within the portfolio, such as opting to invest in a fund rooted in municipal bonds.
One important element of active management is the provision of personalized service. Actively managed funds have a portfolio management team comprised of investment professionals who frequently monitor your portfolio, giving you ease of mind. You will enjoy customized services, which can be crucial in helping you meet your financial goals by taking the approach most suitable for your preferred level of risk. With an actively managed portfolio, the manager monitors your investments and makes adjustments as needed to mitigate losses or simply harvest gains. Portfolio managers usually communicate with clients regarding their portfolio investments. For example, they may update you on new investments and the rationale for their investment decisions, or they may review your portfolio’s performance with you, so that you remain on track to meet your long-term financial goals.
Investing with Kingdom Capital Management
At Kingdom Capital Management, through active management, we provide clients a specialized service through which we seek to understand their specific investment objectives and retirement goals while pursuing complementary investments that align with their goals and objectives. We invest in individual companies and typically maintain a concentrated portfolio that holds a handful of investments at a time, thus allowing us to have intimate knowledge of our holdings. This management style is suitable for investors who are not risk-averse, who are long-term minded, who seek to compound potentially high returns over time, and who prefer personalized investments managed by a firm that mutually aligns with their overall interests. In other words, our firm itself generally holds the same investments as our clients' portfolios—essentially creating a mutually aligned interest (if the client wins, we win together, and vice versa).
The Bottom Line
In summary, the choice between active or passive management comes down to personal preference and which approach will help you to meet your long-term financial goals most effectively. Passive management has its benefits, but it does not offer flexibility, personalized service, or customized investment opportunities (i.e., private equity) the way active management can.
If you prefer an actively managed portfolio, or would like to discuss this further as an addition to your portfolio, contact us. We would be delighted to assist in helping you invest in your future.
Disclosure: The content of this article is for informational purposes only. It represents views, assumptions, and forward-looking statements made by Kingdom Capital Management, Inc., which is engaged in the business of trading--buying and selling securities and financial instruments on behalf of its clients. The information contained herein should not be perceived as investment advice or a recommendation or solicitation to buy or sell any securities mentioned in this article. Past performance is not necessarily indicative of future results. All investments involve risk, including the loss of principal. Investors are encouraged to perform their own due diligence and to consult a tax or legal professional before engaging in any transaction.