Active portfolio strategy – definition and meaning

An Active Portfolio Strategy is an investment strategy that tries to maximize a portfolio’s value.

Investors and fund managers use various techniques that evaluate which financial securities will yield the greatest returns – yield refers to what percentage of return an investment generates.

In an active portfolio strategy, market analysis plays a critical role, with managers constantly evaluating global economic indicators, political events, and company-specific news to inform their investment decisions.

There are two main types of portfolio strategies: passive and active strategies.

A passive strategy has a more hands-off approach, while an active strategy involves the ongoing trading of investments.

An active portfolio strategy tries to generate maximum value by using as much information that is available and forecasting techniques to outperform a buy-and-hold portfolio. It has a long-term aim of moving capital consistently into profitable securities.

Payrollheaven.com has the following definition of the term ‘active portfolio strategy’:

“An investment approach in which an investor uses a variety of forecasting and assumption techniques to determine which securities to purchase in order to achieve a high return.”

Active portfolio strategy – the aim

Portfolio managers say that an active portfolio strategy probably performs better than a buy-and-hold portfolio. With an active portfolio, investors try to move capital away from poor-performing stocks. Above all, the aim is to transfer the money into potentially higher-performing securities.

For example, active portfolio managers, whose benchmark is the Standard and Poor’s 500 index, will attempt to generate returns that outperform the index.

They will do this by over-weighting certain industries or securities – essentially allocating more to specific sectors than the index does. They believe that these targeted sectors are outperforming others.

Portfolio managers could choose not to employ an active strategy based strictly on future interest-rate movements. They could make an interest-rate bet to account for inferior performance relative to a benchmark.

Essentially, this portfolio strategy is more dynamic than others, because investment decisions change much more frequently. It attempts to make the most of market inefficiencies. However, active portfolio strategies are more costly.

Modern active portfolio strategies increasingly leverage advanced algorithms and machine learning techniques to analyze vast datasets and identify investment opportunities more rapidly than traditional methods.

Through active management, the degree of liquidity for the securities can increase portfolio costs. In contrast, passive management uses infrequent trading trends that minimize portfolio costs.

A trend is a perceived tendency in the market, i.e., which way (up or down) it is going.

Stock selection

There are two main types of active management approaches to choosing stocks:

Top-down – this approach involves analyzing the market and then predicting which industries will perform the best. The focus is on the current economic cycle. Managers then pick stocks in these industries that are likely to do well.

Bottom-up – this approach does not take into account market conditions and trends. Managers choose stocks according to the strength of a company’s financial performance. Additionally, they analyze what senior management is planning for the future.

The bottom-up approach assumes that firms performing well will continue doing so even in volatile markets.

Risk

There is one major drawback with active management approaches. It is very uncommon for active portfolio managers to beat the market. Consequently, many investors prefer a simple indexing strategy.

Most investors prefer a strategy which allows a portfolio to grow from the long-term growth of the economy.

Compound Phrases with “Portfolio”

The term “portfolio” is widely used in finance and other fields to refer to a collection of investments or works. Here are six compound phrases incorporating “portfolio,” each illustrating a different aspect of this versatile term:

  • Portfolio Diversification

Spreading investments across various assets to minimize risk.
Example: “To safeguard against market volatility, she focused on portfolio diversification.”

  • Portfolio Manager

A professional responsible for making investment decisions for a portfolio.
Example: “The portfolio manager decided to rebalance the assets to optimize returns.”

  • Portfolio Optimization

The process of choosing the best mix of assets to maximize returns for a given risk level.
Example: “Through portfolio optimization, the firm aimed to achieve the best risk-return balance.”

  • Portfolio Allocation

The distribution of assets within an investment portfolio.
Example: “His financial advisor suggested a change in portfolio allocation in light of the economic downturn.”

  • Portfolio Analysis

The examination of the performance and risk of an investment portfolio.
Example: “Regular portfolio analysis is crucial to stay aligned with long-term investment goals.”

  • Portfolio Holdings

The specific assets or investments owned within a portfolio.
Example: “She reviewed her portfolio holdings to ensure alignment with her ethical investment strategy.”

Video – What is an Active Portfolio Strategy?

This video, from our YouTube partner channel – Marketing Business Network – explains what an ‘Active Portfolio Strategy’ is using simple and easy-to-understand language and examples.