There’s an ongoing debate between proponents of active management – which refers to mutual funds that are actively managed by a portfolio manager – and passive management – which typically refers to funds that simply mirror the composition and performance of a specific index, such as the Standard & Poor’s 500® Index. (See: Is Now the Time to Consider Actively-Managed Funds?)
What is passive management?
Investors can't invest directly in an index, but passive management is an approach to managing a mutual fund or investment portfolio in which the manager attempts to mirror the performance of an index by holding the same or similar securities. A typical passively managed fund might contain all of the stocks in a particular index like the S&P 500, a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks. When the S&P 500 rises and falls, so does the passive fund, often by similar amounts. When individual stocks move in or out of the S&P 500, the fund buys and sells the same stocks. Trades within the portfolio are automated, with little or no human decision-making involved.
For passive funds that mirror indexes like the S&P 500, this is sometimes referred to as “buying the market.” This buying and selling incurs management and other expenses, thus performance for these funds may vary from that of the index itself. Even so, it’s a simple and straightforward investing approach that makes these funds a popular choice for some investors.
How is active management different?
Active management, which is also popular with investors, takes a different, more hands-on approach. Rather than following preset rules to build a portfolio of stocks or bonds, the managers of actively managed mutual funds make the buy and sell decisions, selecting individual stocks and bonds according to a rigorous methodology and thorough company research. When you invest in these funds, you’re benefiting from the years of experience across a wide range of market conditions that fund managers provide. Investors who prefer funds with active management believe this more nimble, human approach provides a real financial value that passively buying the market (or a segment of the market) based on an automated model cannot. Active fund managers have a host of resources to help them track and respond to the market’s ups and downs as well as positive or negative changes to individual company’s fundamentals.
Often, teams of analysts and experts help identify investing opportunities, make buy and sell decisions, and manage the fund on a daily basis. These teams work to maintain the right mix of investments which they believe will achieve each fund’s specific goals for performance and risk. Decisions are supported by financial analysis and modeling tools that help forecast possible market performance. This combination of human know-how, sophisticated tools, and seasoned fund managers delivers rigor and discipline that makes active management so attractive to many investors. Of course, all this research and analysis costs money, which usually leads to actively managed funds having higher expense ratios than passively managed funds.
When you invest in an actively managed fund, you’re tapping into the collective expertise of the fund managers and their teams who understand the factors that can impact individual companies and the market as a whole. Whether it’s adjusting the holdings of a fund due to the shift in fundamental characteristics of a specific company, a rise in interest rates, or an upcoming trade agreement in Asia, active fund managers are making hard, but reasoned decisions—all on your behalf.
Active management by Thrivent Mutual Funds
We believe that active management brings a more sophisticated, rigorous approach required for the complex task of investing today. While it would be great if the markets (and our retirement accounts) only went up, a significant part of successful investing depends on being prepared for the inevitable periods of market instability. This requires the insight that only active fund management can provide. If you’re looking for a way to invest that could outperform the broader market and weather periods of market downturn, you should consider the dynamic decision making and advanced planning that only actively managed funds deliver.
Of course, there is no guarantee that these funds won’t underperform the market from time to time, but when you simply buy the market you generally miss the opportunity to beat the market. Active management by Thrivent Mutual Funds allows you, no matter your life stage or the market conditions, to invest wisely for the future. When you choose to invest with Thrivent Mutual Funds, you’ll benefit from the expertise of our investment professionals and the convenience and choices we provide to make investing easier.