At CI Investments, we believe that active portfolio management adds significant value for investors.
Active management can help you achieve financial success by focusing on high-quality securities with attractive potential for returns, by avoiding overvalued securities that may be vulnerable to a correction, and by managing risk. In contrast, passive management forgoes these strategies.
CI has engaged leading active portfolio managers who have been selected for their strategic focus, consistent discipline and long-term track record of investing in Canada and around the world.
What is passive management?With a passive approach, also known as indexing, one invests in a portfolio that seeks to hold all the securities, in the same proportion, as the index, or a representative sample of the securities in the index. The goal is to track the performance of the index, so an investor’s returns will rise and fall with that benchmark. A passive portfolio will own the companies represented in an index regardless of their quality or performance.
What is active management?With an active approach, the portfolio managers follow a disciplined process in which they research, analyze, and buy and sell securities based on the investment mandate of the portfolio. The managers seek to invest in quality securities that offer the potential for attractive returns. Active managers will also pay careful attention to the composition of the overall portfolio, managing risk through diversification and exposure to factors such as industry sectors, geographic regions and currencies.
There are fees and expenses associated with both approaches. It’s worth noting that active management offers the potential to outperform the market benchmark, while a passive portfolio will underperform the index due to fees and expenses.
Benefits of active managementHere are some of the ways that active management benefits investors:
Downside protection: Financial markets move in cycles, with periods of decline being a normal part of investing. The financial crisis and bear market of 2008-09 are still fresh in the minds of many investors. During periods of market weakness, active managers can take steps to protect the assets within a portfolio by switching to safer, more stable investments. Meanwhile, a passive mandate offers no flexibility and is designed to be fully invested at all times.
Positioned for opportunity: An actively managed portfolio can be structured to invest in securities and sectors that offer greater potential growth than the market as a whole, while managing risk. Active managers can add value by identifying and buying companies that are temporarily undervalued or out of favour, or those that offer above-average growth prospects. They also may avoid overvalued stocks that may be susceptible to a decline. A notable recent example is Valeant Pharmaceuticals, which lost over 90% of its value in less than a year.
Asset allocation: How the assets of a portfolio are allocated among asset classes such as the various types of equities and bonds is one of the most important determinants of overall performance. Active managers will respond to changes in the markets and the economic cycle by adjusting the allocation of their portfolios to reduce volatility and improve results. Investors with passive investments are more likely to be missing out on this crucial aspect of investing.
Diversification: Indexes do not always make for optimal portfolios, as they can have heavy weightings in certain sectors. More than half of the market capitalization of the S&P/TSX Composite Index, for example, is in just two sectors, energy and financial services. An actively managed portfolio can diversify away from such concentrations, and can include attractive sectors and securities that are not well represented in the index.
Recent studies have shown that truly actively managed portfolios tend to outperform. A 2009 paper by Yale finance professors Martijn Cremers and Antti Petajisto concluded that the best-performing funds focus heavily on stock selection, and have high “active share,” a measure that identifies the portion of a portfolio that is different from the benchmark index.
An actively managed portfolio represents the expertise of highly trained and experienced professionals working on your behalf. CI offers a wide range of actively managed investments to help you meet your personal financial goals.
For more information about how active management benefits you, please talk to your financial advisor.