15.4 Portfolio Manager Styles

The Portfolio Manager Styles

5 | Compare and Contrast the Portfolio Management Styles of Equity and Fixed-Income Managers

Portfolio managers, and to some extent, investors, tend to use a combination of two primary investment strategies: active or passive.

Active vs. Passive Strategies

Active Management

• Definition: Active management involves portfolio managers making specific investments with the aim to outperform an investment benchmark index. This includes frequent buying and selling of assets to take advantage of changes in the market.

  • **Advantages: ** Potential for higher returns, flexibility in response to market changes
  • Disadvantages: Higher fees due to frequent trading, more demanding research and analysis
  • Styles: Includes strategies such as stock picking, market timing, and sector rotation.

Passive Management

• Definition: Passive management, on the other hand, attempts to replicate a benchmark index without frequent trading. It seeks to achieve returns similar to the overall market performance.

  • Advantages: Lower fees due to less trading, reduced complexity, steady long-term returns
  • Disadvantages: Limited potential for outperforming the market
  • Styles: Employs strategies such as index funds and Exchange-Traded Funds (ETFs).

Equity Managers vs. Fixed-Income Managers

Equity Managers

• Focus: Equity managers focus on stocks or equities.

  • Styles: Growth vs. Value Investing
    • Growth Investing: Investing in companies expected to grow at an above-average rate.
    • Value Investing: Investing in undervalued stocks believed to provide a return when the market corrects itself.

• Active Equity Management: Relies on the analysis of market trends, economic data, and earning prospects to select stocks that will outperform the market.

• Passive Equity Management: Typically involves investing in stocks that mirror a benchmark index, such as the S&P 500.

Fixed-Income Managers

• Focus: Fixed-income managers concentrate on bonds and other debt instruments.

  • Styles: Duration management, credit quality analysis
    • Duration Management: Adjusting the portfolio’s sensitivity to interest rate changes
    • Credit Quality Analysis: Selecting bonds based on the creditworthiness of issuers

• Active Fixed-Income Management: Involves frequent adjustments to bond holdings based on interest rates, credit risks, and changing economic conditions.

• Passive Fixed-Income Management: Generally involves creating a bond portfolio that mimics a bond index to achieve market-like returns.

Charts and Diagrams

    pie
	    title Active vs. Passive Management
	    "Active Management": 50
	    "Passive Management": 50

Key Takeaways

• Active Management: Aims for higher returns but comes with higher fees and volatility.
• Passive Management: Offers lower fees and steadier returns but it generally doesn’t outperform the market.
• Equity Managers: Have styles focused on growth vs. value investing.
• Fixed-Income Managers: Focus on duration management and credit quality.

Glossary of Terms

• Active Management: The use of a human element to manage a fund’s portfolio by seeking to outperform benchmarks.
• Passive Management: A style of management where a fund’s portfolio mirrors a market index.
• Equity: Stocks representing ownership interest in companies.
• Fixed-Income: Securities like bonds that provide returns in the form of periodic income payments and the repayment of the principal.

Frequently Asked Questions

1. What is the main difference between active and passive management?

   • Active management involves frequent buying and selling to outperform a benchmark, whereas passive management attempts to replicate benchmark returns with minimal trading.

2. What are the primary styles of equity investing?

   • The primary styles include growth investing and value investing.

3. How do fixed-income managers handle risk?

   • Fixed-income managers handle risk via duration management and credit quality analysis.

4. Are fees higher for active or passive management?

   • Fees are generally higher for active management due to frequent trading and analysis.

In this section

• 15.4.1 Active Investment Management
  Discover the methods and strategies involved in Active Investment Management, focusing on effectively outperforming benchmark portfolios using bottom-up and top-down analysis.
• 15.4.2 Passive Management
  In-depth understanding of passive management, detailing indexing and buy-and-hold strategies for Canadian Securities Course certification prep.
• 15.4.3 Equity Manager Styles
  Learn about different equity manager styles used in investment management: growth, value, and sector rotation. Discover each style’s approach, risks, and suitable investor profiles.
• 15.4.4 Fixed-income Manager Styles
  Explore the various styles of fixed-income managers and how their strategies differ based on term-to-maturity, credit quality, and interest rate anticipation. Learn about the terms, frequently asked questions, and key concepts in fixed-income management.