The practical applications of active strategies

As a fundamental objective, an active portfolio strategy should always deliver better performance than suitable benchmarks - otherwise investors will naturally resort to the methods that deliver better returns for the same risks. When considering the capital theory framework, it is implied that the risk-adjusted return of active strategies will be higher than that of the benchmark. However, in order for this statement to be true, the benchmark must be specified as comprehensively and in as much detail as possible. In practice, this often causes problems, because in many cases benchmark indices are used that do not sufficiently meet the requirements of investors. If a portfolio is also based on international forms of investment, corresponding currency aspects may have to be taken into account. A good benchmark portfolio should therefore on the one hand represent as real an alternative as possible and also be very well diversified, but on the other hand it must also be accessible at a price that is not too high and available before the investment decision is made.

The main techniques of an active portfolio management are stock picking or stock selection: however, these methods require on the one hand forecasting skills that go far beyond the average, and on the other hand a good timing for the different decisions of the investment. It is essential for a manager who uses active portfolio strategies to have advantages over the other investors. These relate to areas of information as well as areas of interpretation, and a good manager can gain advantages in both areas. In terms of timing, but also in chart analysis, this is why we also speak of "time diversification". In addition, sector rotation is also among the various applied techniques in active portfolio management strategies.

Further application methods

Also often used is the so-called stock screening, which is another quantitatively oriented method in the active portfolio strategies. This method uses the idea of a point value procedure, in which different stocks of the investment universe are evaluated. The most important valuation points or indicators in this regard are:

  •     Earnings growth
  •     Dividend yield
  •     Price-earnings ratio

Depending on the weighting of the individual points, a fixed number of points can be assigned to each share. If a predefined value is reached, the share is bought and added to the portfolio. With the help of a so-called Tilted Fund, the benchmark can also be outperformed: For this purpose, an index is first defined and tracked, while various individual stocks in the Exness mt4 download are overweighted. These overweights are usually selected according to growth rates, but also according to sectors or company sizes.

Another technique used by managers using active portfolio strategies is rooted in forecasting factor formation. This method is already used in the construction of an investment portfolio: This is then designed to have a sensitivity specifically tailored to the criterion chosen and to be forecast. In this context, changes in risk premiums, including unexpected inflation adjustments, government bonds, corrections in macroeconomic growth, returns on an index, and changes in the yield structure of bonds are the main factors affecting expected equity returns. This method is mainly used for speculative investment strategies that refer to individual fundamental events without, however, accepting systematic risks. This ensures that the manager's success ultimately depends only on the quality of the forecast he has made himself - always in relation to the selected risk characteristic, of course.