Passive management in LégiFiscal finance
Passive management in finance ¶
There are two main types of management in terms of mutual funds, active management and passive management.
Passive management is also called index management.
Return to active management ¶
Active management aims to outperform the reference market, also called the “benchmark”.
The manager will select securities that he believes are most promising and will outperform the market (in terms of performance).
The idea here is to do better than the reference market.
This selection of securities should, on request, allow for an outperformance of the market average.
Passive management ¶
Passive or index-based management replicates the performance of the reference market.
For example, the reference may be an index such as the CAC 40.
The method consists in replicating the benchmark index, but in “miniature” scale of the fund.
Passive management is based on fixed investment of securities. Therefore, there will be several arbitrages and reallocations of portfolios. In terms of management costs, by the way, operating costs are reduced.
The purpose of this management is to capture market performance.
It is an investment style that seeks the best possible repetition of the underlying benchmark.
At the same time, it minimizes management fees and transaction costs.
The objective of passive management is to faithfully replicate the performance of the benchmark market.
After the portfolio is built, the manager follows the evolution of the supported market.
Passive management simplifies and minimizes the time spent on management.
Management fees are lower with a limited number of remaining transactions,
Passive management aims to replicate the performance of the reference market by replicating its composition on a smaller scale.
For example, a fund based on the CAC 40 index buys 40 stocks in the index. Prices are weighted in proportion to their respective weights.
This management benchmark, index, market, etc. repeats the performance.
Brokerage costs for the manager are lower because the composition of the portfolio is changed only when the composition of the index changes.
A means of diversification
The index management aims to achieve a performance as close as possible to the market or selected index.
This can be achieved in several ways. These are replications used in passive management.
It consists of buying all the securities that make up the benchmark. They are measured by the capitalization amount. They are then weighted according to their respective importance (in terms of a representative percentage of the weight the title represents in the benchmark).
The manager re-adjusts the weight of each title during changes.
The synthetic replication :
Here, the manager uses derivatives. Securities are not held directly. Not all securities represented in the Benchmark are represented.
It approaches the performance of the index while reducing costs.
This is also called the “approximate” technique. Here, the manager will try to get as close as possible to the performance of the benchmark with the smallest margin of error (tracking error).
One of the passive management strategies buy and keep consists of buying and holding securities for a long time.
a way ¶
UCITS (Undertakings for Collective Investment in Transferable Securities), SICAVs, FCPs offer index management portfolios. These funds allow for diversification by replicating the performance of indices.
An ETF (Exchange Traded Funds) or Tracker replicates a benchmark index. It is continuously listed on the stock exchange.
It is a financial instrument that will mechanically replicate the target index.
Index funds, depending on their composition, can be invested in a regular securities account, for some in a PEA (Plan d’Epargne en Actions) or in life insurance.