Many people including financial advisers, financial commentators and investors swear by passive funds or active funds and will not be swayed by other people’s opinions. Personally, I’ve never understood why people have such one-sided opinions.
Let’s start by exploring the difference between passive and active funds.
Passive funds, otherwise known as index-tracker funds, are low-cost funds which track an index by replicating investments in the same investments in the relevant index. Charges are generally low because the fund manager doesn’t have to spend time researching the components of the index. Their job is to simply buy the same investments that make up the index and sell them when they drop out of the index.
Active funds are higher charging funds because you are paying for a fund manager to carry out research in the hope that they will find above-average performing shares and invest in them to hopefully give you superior investment performance. As a result of the extra research that is needed, charges tend to be higher than for passive funds.
In recent years passive funds have become increasingly popular because investment returns have been better than for active funds on average. However, that is more a reflection of how poorly managed are the majority of active funds rather than passive funds being better per se.
Why do I say this? It’s because all passive funds underperform their index. They replicate the investments in the relevant index they are tracking and deduct their charges so it is impossible for them to outperform the index. To me, that is not successful investment. What you need are funds that outperform the index net of charges consistently. Such funds do exist. They are the best active funds.
In our discretionary fund management service, we offer both active and passive funds because we do not believe it is a simplistic choice between each type of fund. We believe that the consistently best performing fund in its sector net of charges should be selected regardless of whether it is a passive or active fund.
Most of the funds we choose tend to be active funds purely because they give on average better returns net of charges than passive funds net of charges. It’s as simple as that. You know it makes sense.*
*Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
