Passive vs.

Active Portfolio Management: An Overview

Investors have two main investment strategies that can be used to generate a return on their
investment accounts: active portfolio management and passive portfolio management.

Active portfolio management focuses on outperforming the market in comparison to a specific

benchmark such as the Standard & Poor's 500 Index.

Passive portfolio management mimics the investment holdings of a particular index in order to achieve
similar results.

As the names imply, active portfolio management usually involves more frequent trades than passive
management.

An investor may use a portfolio manager to carry out either strategy, or may adopt either approach as
an independent investor.

KEY TAKEAWAYS

Active management requires frequent buying and selling in an effort to outperform a specific
benchmark or index.

Passive management replicates a specific benchmark or index in order to match its performance.

Active management portfolios strive for superior returns but take greater risks and entail larger fees.

Active Portfolio Management

The investor who follows an active portfolio management strategy buys and sells stocks in an attempt to
outperform a specific index, such as the Standard & Poor's 500 Index or the Russell 1000 Index.

An actively managed investment fund has an individual portfolio manager, co-managers, or a team of
managers all making investment decisions for the fund. The success of the fund depends on in-depth
research, market forecasting, and the expertise of the management team.

Portfolio managers engaged in active investing follow market trends, shifts in the economy, changes to
the political landscape, and any other factors that may affect specific companies. This data is used to
time the purchase or sale of assets.
Proponents of active management claim that these processes will result in higher returns than can be
achieved by simply mimicking the stocks listed on an index.1

Since the objective of a portfolio manager in an actively managed fund is to beat the market, this
strategy requires taking on greater market risk than is required for passive portfolio management.

Passive portfolio management is also known as index fund management.

Passive Portfolio Management

Passive portfolio management is also referred to as index fund management.

The portfolio is designed to parallel the returns of a particular market index or benchmark as closely as
possible. For example, each stock listed on an index is weighted. That is, it represents a percentage of
the index that is commensurate with its size and influence in the real world. The creator of an index
portfolio will use the same weights.

The purpose of passive portfolio management is to generate a return that is the same as the chosen
index.

A passive strategy does not have a management team making investment decisions and can be
structured as an exchange-traded fund (ETF), a mutual fund, or a unit investment trust.

Index funds are branded as passively managed rather than unmanaged because each has a portfolio
manager who is in charge of replicating the index.2

Because this investment strategy is not proactive, the management fees assessed on passive portfolios
or funds are often far lower than active management strategies.

Index mutual funds are easy to understand and offer a relatively safe approach to investing in broad
segments of the market.
What to Know Before You Become a Portfolio Manager

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By BARCLAY PALMER

Updated May 9, 2019

One of the most coveted careers in the financial industry is that of the portfolio manager. Portfolio
managers work with a team of analysts and researchers and are ultimately responsible for making the
final investment decisions for a fund or asset-management vehicle. While a portfolio manager is a
position a person must work his or her way up to over the course of a career, there are some parts of
the job you should know before you consider moving up to managing a portfolio.

Background of Portfolio Managers

If you are still an undergraduate student who is considering a career as a portfolio manager, take
courses in business, economics, finance, accounting, and math. An MBA degree, in addition to an
undergraduate degree, is borderline essential. Private investment firms or investment banks look
favorably on time spent studying risk management, accounting, and finance. Some master's programs
offer stock-market-specific courses.

Within a firm, portfolio managers are often promoted from the rank of research analyst after working in
that position for two to four years. Working as an analyst is great training for becoming a portfolio
manager. It provides a framework for making crucial portfolio decisions, such as buying or selling a
security and determining the underlying economic conditions that affect those securities.

Types of Portfolio Manager Positions

There are a wide variety of positions within the realm of portfolio manager. The positions depend on the
following criteria:

Size of fund: A portfolio manager may manage assets for a relatively small independent fund or a large
asset management institution. A portfolio manager may also manage the capital of a large business such
as a bank or an organization with a large endowment, such as a college or university.
A manager who manages assets for a large money management institution is commonly referred to as a
portfolio manager, while someone who manages smaller fund assets is typically called a fund manager.
Someone who manages assets for a large business organization or college is commonly referred to as a
chief investment officer (CIO).

Type of investment vehicles: All types of money managers perform virtually the same function:
managing assets for their respective investment vehicles, which vary widely. The range of investment
vehicles includes retail or mutual funds, institutional funds, hedge fund products, trust, and pension
funds, and commodity and high net worth investment pools. Portfolio managers may manage equity or
fixed-income investment vehicles and often specialize in one or the other.

Investing style: In addition to specializing in equity- or fixed-income investing, portfolio managers tend
to specialize when it comes to styles of investing. Investment styles include: hedging techniques, growth
or value style of management, small or large cap specialties, and domestic or international fund
investing.

Licensure and Certification

Working in portfolio management requires professional licenses from the Financial Industry Regulatory
Authority (FINRA). The specific set of FINRA licenses vary based on the types of securities and other
investment assets.

Portfolio managers, as opposed to fund managers, often assume control of very large portfolios for
major financial institutions. If your potential job involves asset management exceeding $25 million, you
will be required to register with the Securities and Exchange Commission (SEC).

For aspiring portfolio managers, the most important qualifications are professional certifications. With
sufficient past experience, the best option might be a chartered financial analyst (CFA) designation.
Other certifications—assuming they are related to economics, finance, investing or accounting—can
bolster a resume, but are no guarantee. As is unfortunate with many other positions, the game can be
more about who you know that what.

A Day in the Life of a Portfolio Manager

Although a day in the life a portfolio manager is diverse, one constant is checking the status of the
financial markets and staying on top of current events. A portfolio manager will meet regularly with his
or her analysts to discuss market developments and the trends of relevant current events.

A portfolio manager directs all of the trades the investment fund or portfolio makes during the day by
making final decisions on the securities involved. He or she meets with analysts who have conducted
research on various securities and the institutions that issued them. Based on their recommendations,
the portfolio manager makes the ultimate decision on what securities to buy or sell. Some asset
management styles, such as growth portfolios or funds, have a higher security turnover than others,
such as value management.

In addition to meeting with the analysts on staff and monitoring the markets and current events, a
portfolio manager has many other responsibilities. Portfolio managers often meet with high-level
investors and potential investors in person or over the phone. In addition, portfolio managers of large
funds often conduct interviews with the financial media such as The Wall Street Journal, The Financial
Times, or CNBC. While they often only give an overview of current economic conditions, appearing in
the financial media provides publicity for the investment vehicles they manage as well as the firms they
represent.

The Bottom Line

A day in the life of a portfolio manager is filled with challenges, but also offers a financial and intellectual
reward. It begins early and often ends late, but in between lie many interesting challenges and
opportunities. If you are highly analytical and have a love of the financial markets and the ever-changing
world of current events, a career as a portfolio manager may be for you.
The Difference Between an Equity Analyst and an Investment Analyst

By: David Ingram

Financial analysts specialize in different markets and investment types.

Financial analysts specialize in different markets and investment types.

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Financial analysts can be divided into different specializations, two of which are equity and investment
analysts. The job duties, educational requirements and career advancement prospects of equity analysts
and investment analysts are similar, but the two job roles are different. Understanding the difference
between an equity analyst and an investment analyst is important for anyone considering a career in
financial analysis.

Equity Analyst Responsibilities

Equity analysts research and report on the fundamental strength of companies in the securities market.
This can include disseminating financial statements and the contents of quarterly earnings calls,
analyzing previous technical trends in the market values of securities, analyzing the soundness of
business models and interviewing company executives. Equity analysts distill large amounts of data into
reports and recommendations about specific companies at different times.

Buy-Side vs. Sell-Side Equity Analysts

Equity analysts can work on either the buy or sell side of the market. On the buy side, equity analysts
can work for mutual funds and financial advisory firms, providing research and recommendations to
fund managers. On the sell side, they can work for investment banks, researching companies that wish
to launch an initial public offering to ascertain the likelihood of success and profitability for the bank
underwriting the sale.
Investment Analyst Responsibilities

Investment analysts take a more strategic, big-picture approach to their research. Rather than focusing
on individual equity securities, investment analysts begin with top-level analysis of global economics and
industry trends. Using big-picture data, investment analysts drill down into specific industries to identify
opportunities for profitable investments in different segments, finally identifying and researching
individual investment options much the same as equity analysts do. Investment analysts are concerned
with matching an entire portfolio's assets with investors' objectives and needs, allocating a mix of stocks,
bonds, real estate investments and other financial instruments as needed, based on their research.

Job Requirements

According to the Bureau of Labor Statistics, financial analysts require at least a bachelor's degree to
obtain an entry-level position leading up to a financial analyst job, but many employers require a
master's degree in finance or economics. Any sell-side equity analysts working directly with investors are
required to carry an active license from the Financial Industry Regulatory Authority, but licensing
regulations are less stringent for analysts who only create internal reports for portfolio managers. A
track record of profitable investments and accurate analysis can help would-be analysts stand out from
those with no real-world experience.

Career Prospects

Equity analysts can work their way up to fund management positions, setting the strategic direction for
their funds and managing a team of other equity analysts. Investment analysts can work their way into
portfolio management positions, making buy and sell decisions for a diversified portfolio of multiple
investment types. Successful and experienced fund and portfolio managers can write books and speak at
industry events to further develop their careers.