Active vs Passive Portfolio Management

Active versus Passive Fund Management

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Table of Contents

1 Introduction 2

2 Active versus Passive Management: Theory 2

3 Active versus Passive Management: Real Life Examples 4

3.1 Pension Funds 4

3.2 Insurance Companies 5

3.3 Asset Management of Financial Institutions 5

3.4 Asset Management of Investment Companies 7

4 Past and Present Trends 9

5 Conclusion 11

References 12

1 Introduction

Nowadays, more and more people are investing in the stock or bonds markets due to the unstoppable technological progress especially in the internet and the Electronic Communication Networks. These progress are making stock and bonds transactions cheaper, faster and easier. The main purpose of someone investing in the market is of course, trying to gain a positive return on his current assets, thereby increasing his future wealth. After deciding to invest in the stock market, people face another choice; should they invest by themselves or should they hire a third party to do it on their behalf? One of these third parties is the so called investment fund where investment managers create a portfolio consisting of a various range of financial securities in which people can invest. These funds usually have two main strategies at their disposal when choosing how to invest: a passive investment strategy and an active investment strategy. Theory as well as practice has shown that it is difficult to select one strategy above the other and this issue still is subject to discussion.

This is why through this paper; we will try to differentiate these two major investment strategies, passive and active. We will elaborate on their respective advantages, disadvantages; then we will discuss some real life examples. More precisely we will select two or three companies from each types of investment fund, in this case pension funds, insurances companies and asset management departments of banks and investment companies and look at...