Passive management is a management model used in investment funds , in which shares are chosen based on external references.
From these references, the sectorial indexes and assets stand out. The objective, then, is to replicate their performance in the market, using them as a guide when composing the portfolio.
When compared to its opposite model (active management), passive management is shown to be a much more conservative option, aligned with profiles that seek greater predictability and security in investments.
How does passive administration work?
First, let’s review the structure of an investment fund!
In this type of application, a manager (also called a portfolio manager) has the function of allocating the capital of a collective of quota holders.
Being responsible for deciding where and when the money will be invested, the manager acts as a resource administrator.
However, this description can make us believe that the function has a greater independence than what it truly has.
This is because, in funds with passive administration, the choice of the destination of the goods is not as free as it seems. The manager cannot simply find any opportunity and invest in it.
On the contrary: in such cases, it must strictly follow what was defined in the fund’s bylaws.
In other words, if the index adopted (the reference we mentioned at the beginning, remember?) Is Ibovespa, it only buys the shares that comprise it.
If it is sectorial, only the shares of companies in a specific sector. For example, as a manager of a fund linked to civil construction, he can invest only in shares of companies in construction companies and the like.
The same happens with the other funds, linked to tourism, fishing, reforestation, etc.
What is the passive fund investor profile?
In general, investors looking for this modality look for more conservative options.
Whether to compose a part of your assets (after all, it is possible to invest in more than one fund and mix the management categories), or as a unique strategy, the passively managed funds represent a greater guarantee of stability in the stock market, at first View.
What are the advantages of investing through passively managed funds?
The first of the advantages concerns not only funds with passive management, but investment funds in general.
Reviewing the previous section, we admit that outsourcing the responsibility for choosing stocks may represent the greatest advantage for some investors. Afraid of the volatile stock market, they acquire a certain confidence when they feel protected by the expertise of a professional.
Even if the autonomy of the manager is limited in this case, it is like learning to ride a bicycle with training wheels. Do you remember the feeling?
Although the wheel is subjected to the larger wheels (in this case, the fund’s statute and the indexes adopted), knowing that they are there releases part of the fear of falling.
In other words, knowing that a specialist watches over your assets, while maintaining part of the reins of the game, with well-defined investment rules, is enough for many.
But passively managed funds also have other privileges, such as:
- The least volatility.
- Lower administration fees, since the search volume required from the manager is also lower;
- It is the model that comes closest to fixed income, in terms of predictability.
What are the disadvantages of investing through passively managed funds?
In general, the biggest disadvantage related to investments with passive management is low risk.
“But how can low risk be a bad thing?” That question probably exploded in your head.
The truth is, unfortunately, you can’t have everything. And, as we well know, in the investment world, the higher the return, the greater the risk.
Therefore, lower risks also usually mean lower returns. And, depending on the objective of each investor, this may be enough to want to stay away from these funds.
What are the differences between passively managed and active managed funds?
As you already know, funds with passive administration limit the manager’s freedom, forcing him to follow the indicators previously chosen.
On the other hand, funds with active management favor the manager’s freedom of choice, since their main objective is to overcome the performance of the indicators. Focused on greater profits, they are similarly open to taking more risks.