Passive vs Active Management

Understanding the difference in fund management

There are two main strategies for investment management, they are called ‘active’ or ‘passive’.

What is active management?

An active fund seeks to outperform the sector of the market they invest in. Active funds vary in investment strategy, some having a very broad brief able to invest in all companies and some are highly specialised. They are run by professional fund managers who have access to extensive research in the sector they specialise in and all aim to outperform their benchmark. A well run actively managed fund offers you the potential for higher returns than the market average.

What is passive management?

Passive funds have been used for many years by pension funds but more recently have become very popular for private investors. Passive funds track the market rather than attempting to outperform it. They can provide you with average returns but at a very low cost compared to active funds.

Surely having the option to outperform the market is best?

So why would you not use active management? Firstly, only about a quarter of actively managed funds will manage to beat the index they are benchmarked against. If you think about it, this is not surprising as the benchmark is an average of all of the investor’s returns and therefore clearly not everyone can outperform the average.

On top of this, active funds typically make a charge of between 1.5 – 2% per annum for the costs of running the fund whereas a passive fund will have much lower expense ratio typically around 0.25% per annum or less. So on top of beating the index, the active managed fund needs to outperform the index by a minimum of 1.5% just to break even.

So, passive is the answer then?

As in most things, there are pros and cons of both approaches. There are a number of active managers who have built their reputation over many years and are well worth the fees they charge for their funds. Active management can also be useful in specialised areas such as healthcare, technology and volatile and emerging markets like Brazil, Russia, India, China etc.

The importance of seeking financial advice

Eastcote Wealth Management has years’ of experience and can help you to determine the risk you are prepared to take, talk about the options for maximising your return within your risk tolerance and then select a suitable portfolio with you. Our investmentĀ solution will reflect your financial goals, attitude to risk and your investment timeframe. We can invest in a range of asset classes, spreading your investments and thereby reducing your risk.

Please do not hesitate to contact us if you would like to discuss your options in more detail. Remember, we offer a free no obligation consultation and will be happy to help if we can. We take a holistic and long-term approach to wealth management, opting to build a lasting relationship with you and provide a tailored solution for all of your investments.

The value of investments and income from the may go down. You may not get back the original amount invested. In addition, past performance is not a reliable indicator of future performance.