Did You Know?

Q: I heard the terms active and passive investment management. What do these terms mean? Is one better than the other?

A: MMBB uses both methods to manage the investment funds.

Active Investment Management: Using financial data, fund managers purchase investments that are expected to outperform the broad market.

These MMBB funds currently use an active investment management approach:

  • Money Market Fund
  • Stable Value Fund
  • Balance Fund
  • New Horizons Fund
  • Social Awareness Fund
  • International Blended Equity Fund
  • US Blended Equity Fund

Passive Investment Management (also known as Index Investing or index funds): Fund managers do not actively choose investments with this approach; they follow a model to create a portfolio to closely track to a specific market index, such as the Standard and Poor’s 500 index.

These MMBB funds currently use a passive investment management approach:

  • US Bond Fund
  • US Equity Index Fund

Which is better? It’s not an issue of ‘better’ or ‘worse’. Rather, it is an issue of understanding that each approach has slightly different objectives, which can lead to different results.

  • Passive Investiment Management Funds tend to have lower fees associated with them. They have fewer trading costs and the actual management cost is lower; there is no cost associated with paying for the expertise of managers to buy and sell investments. If your goal is to ‘beat the market’, this type of fund won’t help you reach your goal because it is designed to replicate a market index.
  • Active Investment Management Funds tend to charge higher fees due to the costs associated with the managers’ expertise in buying and selling investments. The fund managers’ goal is to outperform the market. If your goal is to ‘beat the market’ this type of investment shares that goal (although there is no guarantee it will succeed). By looking for undervalued assets, or finding companies that are on the fast track for growth, these funds are created to try to give an extra edge in performance. They tend to be a bit more volatile than passively managed stocks, so the years that you ‘beat the market’, can be followed by years of doing worse than the market.

In the end, the funds you choose should be closely tied to your own investment style, or your personal risk tolerance.

Discussing your personal investment goals and risk profile with an MMBB financial planner is a great step in evaluating your current investments.

Call us at 800.986.6222, or send an email to us today.