What is meant by the terms “active” and “passive” management?
Active fund management aims to outperform the overall market (or index) by using asset allocation, market timing or stock selection (or any combination of these). Since fund managers must research and analyse their decisions to help them make the right choices, costs to the investor of this style tend to be higher. Conversely, passive fund management does not try to beat the market or index, but simply aims to track it by investing in companies precisely in accordance with the constituents of an index, or by buying a fund which represents all of the constituents – a “tracker fund”. The managers of these funds have far lower expenses, and the charges to investors are lower than for active funds. Supporters of passive funds would argue that many actively managed funds fail to match the index, let alone beat it – on the other hand, advocates of active funds argue that the more investors there are investing in index funds, the more opportunity there is for active investors to be selective
