At a seminar this week I was asked to define what we mean by "active" management. Start with the alternative: passive investing or blindly following market indices is by design price- or valuation-agnostic capital allocation (given the assumption markets are generally right or "efficient"). Irrespective of how overvalued or undervalued an asset class may be, the passive portfolio accepts exposure to it.
In theory the most attractive solution to mitigating these hazards is focusing portfolios on "active" strategies that produce bona fide "alpha": that is, risk-adjusted excess returns that are unrelated to "beta" or the day-to-day movements in mispriced markets as represented by "passive" indices (the ASX/S&P200, for example). This is akin to finding a very cheap house – perhaps offered by a vendor who has to sell quickly because he or she has committed elsewhere—that rewards you with capital gains that have nothing to do with general house price inflation.