What is Active Investing? How do Active Managers generate Alpha? What is Fundamental Research? What mutual funds and investment managers have long-term track records? This article is a primer on Active Investment Strategies and how they differ from Passive Strategies.
Active Investing Strategies
All stock market investing strategies that aim to exploit market inefficiencies are considered Active Investing. Asset Managers that utilize active strategies, generally do so based on proprietary research.
Active Investors generally compare their performance against a benchmark. That benchmark more often than not is the general market. Passively Managed Funds are often called Index Funds, as they are tied to an established index that represents the performance of a particular market.
You cannot invest directly in an index, but Passively Managed Index Funds are designed to closely track the performance of a particular index by mimicking the asset allocation of the index.
For investors in the United States, the S&P500 Stock Market index is the most commonly used benchmark for stocks. Therefore, the S&P500 is used as a proxy for the overall performance of the U.S. stock market. For global strategies, the MSCI World Index is commonly used as a benchmark of the stocks globally.
The performance of Actively Managed Funds depends heavily on the skills, experience and research of the investment managers and research analysts of the funds. Asset Management Companies that adhere to Active Investing normally have in-house research teams and specific investment methodologies.
Fundamental Research is an umbrella term that encompasses many different investment strategies. This can be anything from Macro Economic strategies (research on fundament economic drivers) to the research of the fundamentals of individual companies in order to determine the intrinsic value of specific stocks.
According to Modern Portfolio Theory, all publicly traded securities have two fundamental components: risk and return. The theory uses the volatility as a benchmark for risk. Capital Asset Pricing Models compare the volatility of a stock or a portfolio with the market (denoted as Beta) and compares it with the expected returns. Alpha is realized return above expected return.
By this reasoning, an investment manager that can construct a portfolio of securities that can generate returns in excess of the risks of the portfolio (defined as volatility), is generating Alpha.
Asset Management Companies
There are a plethora of Asset Management Companies that are known for their in-house research. It would be difficult tasks to provide a comprehensive list of active investment managers globally, but below you will find a list of companies whose research we admire at the Fundamental Finance Playbook.
Horizon Kinetics LLC, founded in 1994, is an independently owned and operated investment adviser. The company’s investment philosophy and research are focused on the fundamental analysis of business models and company operations.
Burgundy Asset Management
Founded in 1990, Burgundy Asset Management is a global investment manager providing discretionary investment management for private clients, foundations, endowments, pensions and family offices.
Burgundy employes a quality-value investment approach to preserve and grow our clients’ capital over the long term. Quality-value investing is based on investing in great companies when we can buy them for less than they are worth and holding them for the long term.
Oppenheimer Asset Management
With half a century of experience, Oppenheimer Asset Management (OAM) has earned a reputation for creativity, innovation, and superior investment management. The company integrates traditional and non-traditional portfolios into a unified solution while also offering access to specific investment managers.