Active management

Active management aims to outperform its benchmark index or investment objective, that is to achieve better performance than it.

The manager selects financial securities in geographic areas, sectors, and asset classes that they consider to have strong growth potential. Active management is practiced by a large number of funds.

In active management, the fund can be either "benchmarked" or "non-benchmarked":

- Benchmark management aims for a potential performance close to or exceeding that of its reference index called the benchmark. For example, for a euro equity fund, a benchmark could be the Euro Stoxx 50 index, which is the average of the 50 largest European capitalizations.

- Conversely, non-benchmark management sets a performance objective independently of market movements and therefore of indices. This type of management aims for the best possible performance based on the chosen risk.

2 active management methods

To best manage a fund, the method used to select the securities in the portfolio is crucial.

There are two main methods:

• The qualitative method

This approach is based on an in-depth knowledge of the company (its activity, its managers, its competitors, its environment). After analysis, the manager has a good visibility of the company's value and can estimate whether its stock is undervalued or overvalued compared to the market price (i.e., the market price of the company's stock concerned).

If this price is higher than his estimate, then he considers the stock to be overvalued and will prefer not to buy it. Conversely, if it is lower, he will judge that the stock is undervalued and that it is relevant to buy it.

Advantage of the method: It allows for a more thorough analysis of companies and enables the manager to rely on his experience and convictions. In return, it loses objectivity.

• The quantitative method

This approach is essentially based on databases.

This method can be illustrated by a robot that would have recorded thousands of financial data points on the past of companies, the evolution of their revenue, their structure, etc., and which would be able, in light of this historical memory, to indicate which securities to invest in or not.

This highly automated method is based on mathematical models and financial ratios in order to target the most relevant stocks in a sector, according to defined criteria.

Advantage of the method: The quantitative method optimizes the use of technology and allows for a more objective analysis. On the other hand, it does not allow benefiting from the manager's "instinct."

A fund can combine both methods and optimize them within the same management process. The quantitative approach can be favored to reduce the universe of interesting securities as part of an intermediate selection, then the qualitative approach favored for the choice of the final portfolio in order to optimize the manager's "instinct" and experience.