Comparative analysis of active and passive portfolio management: A theoretical approach

Abstract

The crises that the world has experienced in the last few years are deeply changing the structure of the world economy and therefore of finance. Human being is probably at the end of 40 years of big deflation and may be at the beginning of a great reflation. This evolution will strongly impact the winning investment strategies, and will push investors to experiment with other methods in order to preserve their income and minimize risks. To achieve this, they must implement effective portfolio management by deploying tools and rigorous processes to manage priorities. Portfolio management can be achieved through either active or passive management. Active management aims to outperform the reference market of the managed portfolio. The manager, using various analytical tools, will select in a discretionary way the products, securities or sectors most likely to grow faster than the market. Conversely, passive or index management aims to faithfully replicate the performance of a benchmark market. There are several reasons why investors may choose between the two methods. Using a traditional literature review, this paper aims to outline the characteristics of each form of portfolio management by highlighting the key differences between active and passive management. This paper also emphasizes that personal preferences, investment objectives and risk tolerance play a crucial role in this decision. The main lessons of this article are that active management has the ability to provide higher returns, but is also accompanied by high fees and greater uncertainties regarding future performance. Passive management, by contrast, offers a more cost-effective approach, but can limit the opportunities for outperformance.

Keywords: active management, passive management, investment, literature review, comparative study.

JEL Classification: G11, G14.

Paper type: Theoretical Research.