About the Talk
January 5, 2007 12:00 PM
Tokyo, JapanTokyo, Japan
How’s your investing style?
The growing mutual funds industry owes its numerical growth partly to the assorted investing styles applied by capital managers. Research shows that investing styles greatly influence fund returns, fanning the debate in the financial community about their effectiveness. Here are the major styles utilized by contemporary fund managers.
Passive vs. Active
Passive investors believe that simple investments in a market index fund can create productive long-term benefits. Active investors, in contrast, trust their capability to overtake the entire market by picking promising stocks. The bulk of mutual funds performed below market indexes within the five-year period which ended on December 31, 2015.* Passive investors explain the result on market efficiency, the theory that considers all information reported regarding a firm is represented in that firm's present stock price; and that it is very difficult to predict and benefit on forthcoming stock price levels. Instead of trying to divine the market performance, what passive investors do is to buy the whole market through index funds.
Active investors, in contrast, believe that managed funds will not always perform below the index level of the overall market. So many funds have attained substantially higher revenues. These active players see the market as not always efficiently running and that with research they can discover information not yet obvious in a security's price and thereby gain from it. For instance, some active investors consider small-cap market as being less efficient than large-cap market because smaller firms, in practice, are not monitored as regularly as bigger blue-chip companies. They explain this by the assumption that a less efficient market could prospectively favor active stock selection.