Why Active Management Makes A Difference

The power of choice

Why Active Management Makes A Difference

Choice is at the heart of investing; one can’t own everything. But should investment choices be made in a mechanical way, based on an index? Or should they be made selectively, based the research and expertise of an active manager?

What Active Brings to the Table

A decade of broad market gains, fueled by artificially low rates, has benefited passive strategies and led many to question the role of active management.

But it would be rash to draw sweeping conclusions from such an unusual period in economic history. At other times, the flexibility that defines active management has been essential to generate the income and/or returns desired by investors – and may well be again.

There are, in fact, multiple reasons to choose active management – including the potential to selectively control risk, moderate losses in a down market and to generate outsized risk-adjusted returns by seeking opportunity outside traditional benchmarks. 



Active + Passive: Complementary Strengths

The truth is that there are virtues to both approaches; while often talked about as opposites, they are in fact quite complementary.   

Passive strategies provide broad market exposure, but leave investors exposed to the possibility of price declines. And as we’ve seen since the financial crisis, big changes in the macro environment can introduce unexpected concentration risks in traditional benchmarks.

“If ‘market’ returns do not generate the income or growth needed by investors, something more than ‘market’ may be required"
Joseph Sullivan, CEO, Legg Mason

Active strategies, on the other hand, are well placed to address these issues. In declining markets, they may reallocate assets away from risk, and make pre-emptive adjustments when the macro environment appears uncertain.  What’s more, they can take advantage of short-term mispricing to generate incremental gains.

Given these complementary traits, a portfolio that combines active and passive offers tantalizing possibilities.  The key is to find a balance that reflects an investor’s goals and which leverages the strengths of both approaches. In addition, it’s important that the active strategies selected are truly active – that they differ significantly from available index strategies – or the investor won’t reap the potential benefit of diversifying between the two styles.



IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.

The information provided on this webpage is not a recommendation or an offer to buy or sell any security.  Illustrations are provided as alternative solutions for consideration by financial professionals and their clients only and are based on QS' proprietary outlook which takes into account certain general investment objectives, modern portfolio theory and market indicators. The hypothetical portfolios discussed are not available for investment. Legg Mason does not make recommendations or conduct suitability analysis. All investment decisions are that of the client and his/her Financial Advisor.