What distinguishes active investment management from passive management?

The key distinction between active investment management and passive management lies in their respective objectives and strategies. Active management involves actively selecting stocks or assets with the goal of outperforming the market. This means that portfolio managers are constantly analyzing market conditions, economic trends, and individual company performances to make informed investment decisions that will yield higher returns than a benchmark index.

In contrast, passive management aims to replicate market returns, typically by investing in a broad market index. This strategy generally involves less frequent trading and less active decision-making since the goal is to match the performance of the market rather than outperform it.

The active approach not only requires a higher level of research and analysis but also can lead to higher transaction costs due to more frequent buying and selling of securities in an attempt to capitalize on perceived opportunities. Therefore, the focus on stock selection and the intention to outperform the market are what distinctly characterize active management compared to its passive counterpart.