Why Active Management Makes for a Great Short-Term Play

With markets looking hesitant, and delta a looming specter over economic recovery, the question of where and how to invest hangs over the heads of many. Enter active management funds with their ability to respond quickly to market movements, typically outperforming benchmarks in short-term times of uncertainty.

While passive management funds typically outperform in the long-term, according to Seeking Alpha (think SPDR S&P 500 ETF (SPY), which has outperformed almost all large cap funds in its class over the last decade, including actively managed ones), during shorter-duration periods of time, it’s the active management funds that prosper.

Active management does come with its own risks inherent to being guided by people (no one is perfect after all), but active fund managers seek to outperform their benchmarks by making what they view to be smart market moves.

Consider the below example:

An investor has an investment in fund A, a passively managed fund that is benchmarked to an index with the top 30 orange producers in the U.S. and can only invest in securities within the index. The same investor also has an investment in fund B, an actively managed fund that pulls the majority of its securities from the same index but is not locked into securities just within the index.

A drought hits one of the major orange-growing areas and suddenly orange production plummets and the whole index takes a sharp, downward turn. Fund A is forced to ride out the fluctuations, and as investors panic and withdraw their investments, the fund manager may be forced to sell percentages of all securities invested in, regardless of their valuations. Fund B on the other hand is able to recognize that certain securities remain unaffected, and indeed with a shortage are now increasing in valuation, while those affected by the drought plummet.

The active manager can reallocate to stocks that are performing or choose to buy more of the stocks that are currently undervalued knowing that they will recover, depending on the investment goals of the fund. They also have the added option of shifting assets to securities outside of the index.  In that short space of the downturn, Fund B stands the very likely chance of outperforming the benchmark, either protecting from as drastic of a loss as the passive fund would experience, or possibly even profiting.

Active funds equate to flexibility, and that flexibility is most useful and apparent in times of rapid market movement, or uncertainty. While active management funds come at higher cost, and can potentially incur more capital gains distribution as there can be more buying and selling of securities, the benefits in turbulent times can often outweigh those costs.

T. Rowe Price believes in the difference and benefits to active management. The firm currently offers five actively managed ETFs, including the T. Rowe Price Dividend Growth ETF (TDVG) and the T. Rowe Price Growth Stock ETF (TGRW). The firm brings a bevy of experience and research to its products, with portfolio managers averaging over 20 years in investing each, as well as over 400 investment professionals dedicated to researching companies within ETFs.

For more news, information, and strategy, visit the Active ETF Channel.