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Words from the Wise on Active Management Research Team | Posted On Wednesday, April 08,2009, 03:34 PM

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Words from the Wise on Active Management



Everybody with any bona fide experience with investments knows how difficult it is to predict where the markets are heading. Similarly, those familiar with the industry are aware that many funds and portfolios are passively managed. Despite often ambiguous advertising, many investments go up and down roughly in line with the market, or the relevant index. On the other hand, this kind of performance is not what investors expect from an actively managed portfolio.

Follow the Business Cycle

Growth stocks are the big tip for 2007, both in the U.K. and overseas, as many fund professionals believe superior income-producing stocks have had their day. In other terminology, shifting from one basic type of equity to another may substantially increase the returns on a portfolio. At diverse times and phases of the business cycle, diverse types of stocks become more or less likely to be winners; hence, active management entails anticipating these changes and adjusting your portfolio accordingly.

Know the Market

"Your Money Is in Their Hands", U.K. equities are neither enormous value nor poor value, and although in relation to bonds they are a definite buy ... banks have had a monumental ten-year run. They were once economical but they aren't now. Which investments still present high-quality value for investors and which are past their prime? When it comes to active management, understanding the market is the key to beating it.

Go with the Flow

The future, nonetheless, may be very different: "many observers view the present situation critically … corporate bonds are too expensive." Investors are warned that the euphoria in this market may stop in "a nasty surprise." If you want to be successful at actively managing your portfolio, you must remember that past performance/experiences can only lead you so far and that the incapability to change often leads to a potentially hazardous outcome.

Going Defensive

Amid the present stock market turmoil, it is not astonishing that many fund managers are battening down the hatches and adopting a more defensive posture. They are spinning away from riskier mining and natural resources plays and going for solid, income-producing stocks. Whether this approach applies depends on market conditions, but it certainly makes sense to think in such terms; the global economy moves quick and the interplay between one group of stocks compared to another is dynamic and can lead to quick gains or losses. If you want to play it safe, put more money into the more predicable and it must be reliable non-cyclical sectors. If you want to threat your capital in cyclical stocks, watch the markets every day and be sure to have a loss-minimization strategy in place.

Over- and Underweight

More overweight in the U.S. than he had ever been, with a fastidious emphasis on oil refineries and paper companies. Knowing where to be over- or underweight can be vital to investment success. But it needs to be complete on a sufficient scale to make a difference. Too many managers and investors shift so little one way or the other that is barely worth the bother. Tiny minute changes are just meaningless window dressing; therefore, if you make changes to your portfolio, ensure that they are huge enough to create the intended effect.

Using Ratios and Indicators

The P/E ratio is heavily used. How reliable this and the other indicators are is always prone to debate, but using metrics and other types of indicators makes investing less of a gamble. There is undoubtedly no need to treat the markets like a roulette wheel and let someone else gamble with your money.

Country Funds - In and Out of Fashion

The Indian economy was "booming and that its stock market has soared." Now is a good time to be plunging your investor toes into India." It might be that the market "will pause for breath sooner rather than later." If the opportunities for profit are improved somewhere else, consider broadening the borders of your portfolio.

The General Principles

If you have a good advisor, he or she will either notify you of how you can actively manage your portfolio, or use them to cautiously manage your investments on your behalf.

If you are seeking an aggressively managed portfolio, what you most certainly don't want is for your money to be abandoned to its fate in the market without any real management at all, or for your broker to go for "last year's winners". A good money manager should be talented enough to tell whether (as the old saying goes) the train has already left the station.

Meanwhile at the same time, it is often a mistake to follow every expected trend and end up churning your own portfolio. Nevertheless, a sensible amount of rebalancing and switching around among and within asset classes is an crucial part of the investment process. We hope the financially confidence writers and managers we have quoted here will inspire you to follow their lead.

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