Active managers employ a variety of strategies to generate superior investment returns compared to the broader market. These strategies are designed to take advantage of market inefficiencies, exploit mispriced securities, and capitalize on short-term market fluctuations. While there are numerous active management strategies, some of the main ones include fundamental analysis, quantitative analysis, technical analysis
, and macroeconomic analysis.
Fundamental analysis is a widely used strategy that involves evaluating a company's financial statements, industry dynamics, competitive position, and management team to determine its intrinsic value. Active managers who employ this strategy aim to identify undervalued or overvalued stocks by conducting in-depth research and analysis. They often use various valuation models, such as discounted cash flow
(DCF) analysis or price-to-earnings (P/E) ratios, to assess a company's worth. By identifying discrepancies between a stock's market price
and its intrinsic value, active managers can make informed investment decisions.
Quantitative analysis is another popular strategy used by active managers. It involves using mathematical models and statistical techniques to analyze vast amounts of data and identify patterns or relationships that can be exploited for investment purposes. Active managers employing this strategy may use computer algorithms to screen stocks based on specific criteria, such as earnings growth, price momentum
, or volatility. They may also utilize sophisticated risk models to manage portfolio risk and optimize asset allocation.
Technical analysis is a strategy that focuses on studying historical price and volume data to predict future price movements. Active managers employing this approach believe that market trends and patterns can provide valuable insights into future stock performance. They use various tools and indicators, such as moving averages, support and resistance levels, and chart patterns, to identify buy or sell signals. Technical analysts often rely on visual representations of price data, such as charts or graphs, to aid their decision-making process.
Macroeconomic analysis is a strategy that involves analyzing economic indicators, government policies, and global trends to make investment decisions. Active managers employing this strategy aim to identify macroeconomic factors that can impact asset prices and adjust their portfolios accordingly. They closely monitor indicators such as GDP growth, inflation rates, interest rates, and geopolitical events to assess the overall health of the economy
and make predictions about future market conditions. By positioning their portfolios to take advantage of anticipated economic trends, active managers seek to outperform the market.
It is important to note that active managers often combine multiple strategies or adapt their approach based on market conditions and their investment objectives. They may also employ other strategies, such as event-driven investing, value investing, or momentum investing
, depending on their expertise and market opportunities. The choice of strategy depends on the manager's investment philosophy, risk tolerance
, and ability to generate alpha – the excess return above a benchmark index.
In conclusion, active managers employ various strategies to generate superior investment returns. These strategies include fundamental analysis, quantitative analysis, technical analysis, and macroeconomic analysis. By utilizing these approaches, active managers aim to identify mispriced securities, exploit market inefficiencies, and capitalize on short-term market fluctuations. However, it is important to note that the success of active management strategies can vary, and investors should carefully evaluate the track record and expertise of active managers before making investment decisions.