Fees

Active Management

What is active management?

The use of a human element, such as a single manager, co-managers or a team of managers, to actively manage a fund’s portfolio. Active managers rely on analytical research, forecasts, and their own judgment and experience in making investment decisions on what securities to buy, hold and sell.

Why and when to use?

Bond funds, small and emerging market funds.  Bonds are subject to interest rate changes.  In today’s market, interest rates will eventually rise.  Active managers can reduce the duration of a bond fund, which limits loss of principle.  Additionally, active management can allow the fund manager to pick up higher yielding bonds when interest rates rise.  Active management should be used for some smaller and mid-sized companies as well as international funds.  Smaller companies tend to fail first, which makes a review of business practices and financials more important.  Emerging markets often lack transparency.  Actively managed funds send people companies in emerging markets to determine the underlying value of a company.

Why and when not to use?

Large established markets do not need to be actively managed.  Indexes like the S&P 500 measure and rank large companies.  Actively managed funds cost more due to the human element.  There is no need to spend the extra money on large, well known industries.

Costs  

Actively managed funds typically cost around 1% to 3% per year, depending on the cost structure and type of fund.  Actively managed funds can be purchased as a loaded fund, a load waived fund or a level loaded fund.  Loaded funds are called A shares.  A shares have an upfront cost, typically around 5%, with an internal expense around 1%.  Load waived funds do not require upfront costs.  Level loaded funds are called C shares.  They have no upfront costs, have higher internal expenses, typically around 2%.  

Internal fund expenses rise as the difficulty of valuing a business increases.  For example, an actively managed fund of large U.S. based companies would have the lowest costs, while a fund made up of small companies in an emerging market

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