Portfolio managers are individuals who invest the assets of a fund. They generally handle either an ETF exchange traded fund, a mutual fund, or a closed end fund. Their responsibility is to carry out the daily trading of the portfolio and to put into practice the fund’s investment strategy.
When investors are considering different funds in which to invest, among the most critical elements to think about is the name, reputation, and track record of the portfolio manger. This is especially true if they are involved in active portfolio management as opposed to passive management. Though there are numerous active fund managers in the markets, the track records of historical performances are not encouraging. Only a small minority of them are successful in beating the main market indices.
These managers engage in portfolio management as part of their daily routines. This is the science of making difficult decisions regarding the funds objectives. They must weigh investment mix against objectives, carefully balance the fund risk versus performance, and allocate the assets for the funds customers.
The management of a given portfolio revolves around opportunities, risks, weaknesses and strengths of various categories. These include deciding between equity investments as opposed to debt instruments, international versus domestic securities, and safety as compared to growth. There are numerous trade offs involved in this type of management as a manager makes tough choices in an effort to increase returns to the optimal point for the risk the investors are willing to take.
Passive management is the form of managing a portfolio where the holdings of a fund track an index in the markets. This is most often known as index investing or indexing. Active management is the opposite form. It requires that either one manager, a few managers working together, or even a management team strive to try to outperform the market’s return. They try to do this by managing the portfolio actively. They make choices and investment decisions utilizing research on individual securities and positions. Among the different actively managed funds are closed end funds and many mutual funds.
In passive management, the style is to have the holdings of the fund identically reflect the benchmark index. This is the direct opposite of an active style of management where the managers are buying and selling securities in the portfolio according to different investment strategies.
Passive managers and the followers of this particular management type hold with the efficient market hypothesis. This idea says that the markets always reflect and factor in all relevant information all of the time. It believes that picking stocks out individually is a waste of time. Followers of this premise believe that the best method for investing is to put investment funds into index funds. History shows that these funds have performed better than most of the funds which are actively managed.
Active management still has a significant following. It utilizes the human efforts of the management team, co managers, or single portfolio manager to manage the funds portfolio on a daily, weekly, and monthly basis. These active managers work with forecasts, analytical research, and their own personal experiences and judgments to engage in the buying, selling, and holding decisions of the various securities.
The sponsors of these actively managed funds and their investment companies hold that a really good manager can beat the market. This is why they employ professional fund managers to actively handle the portfolio funds. Their goal is to beat those returns of their benchmark. For a large cap stock fund this would mean outperforming the S&P 500 index. Despite the best efforts of a considerable majority of active fund managers, they have not been able to do this successfully.