Portfolio management is all about selecting a group of assets and overseeing their performance. However, it’s a broad term that encompasses various approaches, one of which is active portfolio management.
The definition states that this type of portfolio management refers to actively buying and selling securities depending on the market condition. The goal is to outperform the benchmark index or a peer fund group.
Opting for this type of portfolio management means doing extensive market research. Since this is a more hands-on approach and requires portfolio managers too do frequent trading, the fees for it are high as well.
Strategy of Active Portfolio Management
Active portfolio management refers to the undertaking of detailed research and analysis of securities. It assesses the market conditions regarding investments in terms of what the investor (you) should actively focus on buying and selling.
This type of portfolio management aims to generate alpha returns by not just outperforming the benchmark index. It also generates such returns by capitalising on mispriced securities or market inefficiencies. So, here is how it assesses the market condition to generate returns.
The goal is to invest in asset classes that have low or negative correlations. It means that if one moves down, the other will counter-interact and move up. Mutual funds are easy ways to select asset classes to diversify your portfolio. However, you must be aware of hidden costs and trading commissions.
The theory of active portfolio management does not align with the EMH, or Efficient Market Hypothesis. As per EMH, you cannot beat the market in terms of returns on investment. This occurs as the stock price becomes finalised after considering all the crucial factors.
However, according to active managers, the market has some inefficiencies that cannot accurately price the stocks. Hence, through this, they tend to profit from the mispricing of stocks through active portfolio management. Therefore, when it comes to analysing the price and growth of stocks, it resorts to two ways of doing so. Find out its strategies below.
- Fundamental Analysis
This requires evaluating the company’s financial health and growth potential by assessing its financial statements. Portfolio managers will also take a look at their competitive advantages and corporate governance issues.
The manager will come up with the intrinsic value of the asset, which they can compare against the market value. It helps in determining if the asset is undervalued, par value, or overvalued.
If undervalued, then such stocks can become buying investment opportunities. On the other hand, overvalued stocks are good selling opportunities. However, this approach takes more time. Not just that, it also depends on inputs like quality of information that go into deriving the intrinsic value.
- Technical Analysis
The second strategy of active portfolio management, technical analysis, strives to analyse historical price and volume data to analyse patterns and trends. It is most useful for short-term and long-term investment strategies. It helps signal the buying and selling opportunities.
There is now a shift in focus to identifying patterns in the charts and data,not on any information. There are, of course, a few advantages to choosing active portfolio management. Let’s see how you can maximise your investments by choosing this type of portfolio management.
5 Advantages of Active Portfolio Management
- Potential for Higher Returns
Active managers exploit market inefficiencies and select high-performing securities. Then, they find the perfect time to make their trades to beat the market.
- Tailored Strategies
Choose high-performing securities and time your trades to outperform the market with tailored strategies. Active managers can craft personalised portfolios tailored to your specific investment objectives, risk tolerance, and prevailing market trends, offering you flexibility in managing your investments. These managers can swiftly adapt to shifting market conditions by reallocating assets from riskier to safer options and carefully selecting securities and assets.
- Risk Management
Active management excels in risk management by enabling rapid responses to market changes and helping mitigate losses during market downturns. Additionally, it provides tax advantages, as active managers can strategically time the sale of assets and securities to reduce capital gains or employ loss-harvesting techniques for tax benefits.
- Security Selection
Managers of active portfolio management use a number of analytical tools and techniques to handpick the individual securities that they think will outperform the market. This includes technical analysis and/or fundamental analysis. Apart from the security, there is another way an active portfolio allows one to make the most of their assets. This is also called asset allocation.
- Asset Allocation
With advances in active portfolio management, investors like you can have an investment portfolio that has divisions. Such divisions are due to the classes of the assets that you invest in.It could be stocks, bonds, or cash based on your risk tolerance, investment goals, and market volatility.
Investors will always insist on portfolio diversification, as it keeps funds and investments intact in times of market volatility. Therefore, keeping in mind such advantages, let’s see why you, as an investor, must invest in renewable energy through an active portfolio.
3 Reasons for Investors to Consider Active Portfolio Management
- Superior Returns
Investors should consider active management for its potential to deliver superior returns through meticulous investment selection. Furthermore, it empowers investors to tailor their portfolios to suit their individual needs.
- Manage Risks as Per Tolerance
Active portfolio management can help investors manage risk according to their risk tolerance, focus on income-generating investments for a steady cash flow, and facilitate the implementation of a tax plan.
It also helps identify investments aligned with mission-based goals, such as supporting diversity in employment, even if they may not offer the highest short-term financial return.
- Needed for Certain Investment Types
Active management is particularly crucial for certain types of investments, such as ESG or sustainable investing, and specific asset classes like private equity, venture capital, and other alternative investments.
It’s essential to understand the advantages of this type of portfolio management before delving into the best practices in active investing
Investors should consider active investing for its potential to deliver superior returns through meticulous investment selection. Furthermore, it empowers investors to tailor their portfolios to suit their individual needs.
Active management can help investors manage risk according to their risk tolerance, focus on income-generating investments for a steady cash flow, facilitate the implementation of a tax plan;etc.
Active management is particularly crucial for certain types of investments, such as ESG, or sustainable investing, and specific asset classes like private equity, venture capital, and other alternative investments.
FAQs: A Guide to Active Portfolio Management in 2023: How to Maximise Returns in Renewable Energy Investments
How does active differ from passive portfolio management in renewable energy investments?
In simple terms, active portfolios consist of mutual funds that a portfolio manager actively manages and overlooks. While passive portfolio management refers to the funds that mirror the performance of the invested amount in the stocks.
What are the common challenges faced by investors in active investing for renewable energy assets?
Investors who have assets in the renewable energy sector can face challenges like regulatory uncertainties, project development risks, challenging technological landscapes, and market price fluctuations. Such factors can impact returns, and therefore they require careful risk management strategies.
How can I effectively diversify my renewable energy investment portfolio?
You have other investments from which you can gain profit. Look for asset classes that have low or negative correlations. Invest in different asset classes to diversify your investments. This also saves your investment from financial losses when one of the investments incurs a loss in its value..
What are the key performance indicators to monitor in active investing for renewable energy?
Key performance indicators (KPIs) for active investing in renewable energy include: Return on Investment (ROI), Projected Cash Flow, Renewable Energy Capacity Growth, Regulatory Support and Policy Changes, Carbon Emission Reductions, Technology Advancements, Portfolio Diversification and Market Trends and Competition. These KPIs help assess the financial and environmental impact of investments in the renewable energy sector.
Who can assist in portfolio management for active investing in the renewable energy sector?
Investors can seek assistance in portfolio management for active investing in the renewable energy sector from a range of professionals. These include financial advisors with expertise in sustainable investments, specialised renewable energy fund managers, ESG-focused investment firms, and research analysts with knowledge of the sector. Collaborating with such experts can help optimise portfolio performance and align investments with sustainable goals.
Start your investing journey today with active portfolio management here at Sustvest. Invest in projects that are sustainable and generate income and profit from your investment. Our finance and investment experts will analyse your investment portfolio to suggest the best investment plans for you to maximise your profits!
Founder of Sustvest
Hardik completed his B.Tech from BITS Pilani. Keeping the current global scenario, the growth of renewable energy in mind, and people looking for investment opportunities in mind he founded SustVest ( formerly, Solar Grid X ) in 2018. This venture led him to achieve the ‘Emerging Fintech Talent of the Year in MENA region ‘ in October 2019.