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active vs passive

The value of investments can fall as well as rise. You may get back less than you invested.

In our last article we gave you a brief introduction to what a fund is. Here we’re going to talk about two different ways that your fund can be managed and this is something that you’ll need to take into consideration when choosing a fund. Funds can be managed actively or passively so let’s take a look at what that means…

Actively managed funds

Actively managed investment funds are run by professional fund managers or investment research teams who make all the investment decisions such as which companies to invest in or when to buy and sell different assets on your behalf. They have extensive access to research in different markets, sectors and often meet with companies to analyse and assess their prospects before making a decision to invest.
The aim with active management is to deliver a return that is superior to the market as a whole or, for funds with more conservative investment strategies, to protect capital and lose less value if markets fall. An actively managed fund can offer you the potential for much higher returns than a market provides if your fund manager makes the right calls.

Passively managed funds

‘Passive’ tracker funds still have a manager, but the underlying investments are selected automatically in line with the fund’s objectives. Most passive funds track an index like the FTSE 100 or Standard & Poor’s 500 (S&P 500) but the aim isn’t to beat it, it’s simply to match it. To achieve this, the fund will usually invest in all the parts of the market sector. So if the relevant market sector falls or rises by 30%, the fund should too.
The charges for this type of fund tend to be lower because there’s less day-to-day management involved.

So why choose passively managed funds – surely if you want to make money, having an actively managed fund is a no-brainer?

It’s easy to think that but the reality is that few active fund managers are able to consistently outperform the markets they aspire to beat. Even if you choose a fund that has consistently out-performed the market in previous years, there’s no guarantee it will do it again in the years to come, so whilst there is a chance that you could make significantly more money with an actively managed fund, that chance is matched by the risk of your fund not performing well at all.

One of the biggest drags on the performance of an actively managed fund is the costs. For the privilege of getting an expert fund manager, you have to pay much higher fees than you would with a passive investment fund. That means that not only does the fund manager have to outperform the market, but they need to do by a margin that is sufficient enough to swallow their fees and still leave you better off. For many managers this proves too challenging over the long term.

Having said that – actively managed funds wouldn’t exist if there weren’t some winners so don’t rule out the option before speaking to a Financial Adviser. Here at Credius wwe’ve got the experience and professionalism to help you make the most suitable investment choices so why not call us today on 020 7562 5858 or email us at info@credius.com. We’d love to hear from you.

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