Also known as active management or active investing, active portfolio management is an approach to arranging and managing the assets in a portfolio so that the highest possible returns are achieved. In order to accomplish this, managers will often use some specific criteria to set standards for measuring performance, then make changes to the portfolio when and as necessary in order to meet or exceed those standards. It is not unusual for an active investor or manager to make use of some type of benchmark index as this standard, although other criteria may be used if desired.
One of the key characteristics of active portfolio management is that the manager or investor is constantly on the lookout for opportunities to purchase securities that have potential to increase in value within a reasonable period of time. A basic approach is to buy low, then hold the securities during the climb, only to offer them for sale as they begin to plateau in unit price. This process may be used as a short-term strategy, buying and selling those shares within a calendar year, or may apply to assets that continue to increase in value over a number of years. As long as the assets are performing within the standards set by the manager, there is a good chance they will remain part of the portfolio.
An active management process requires that the holdings within the portfolio be continually evaluated in terms of their performance and their value to the goals of the investor. This is in contrast to a passive approach to investing, in which an investor secures assets and then holds onto them for a number of years, paying relatively little attention as the prices of those securities undergo changes. With an active investment approach, the movement of those assets and the markets in which they are traded is something that occurs regularly, and often prompts some type of action on the part of the portfolio manager.
A key benefit to active portfolio management is that investors and managers often come across investment opportunities before others discover them. This allows the investors to acquire the securities before there is a great deal of interest that, in turn, drives up the unit price. At the same time, the approach also affords the chance to spot emerging trends in the marketplace that are highly likely to adversely impact the value of assets in the portfolio, and take appropriate action before the unit prices begin to drop.