Active and passive investments — don’t bank on a binary decision

If you keep a keen eye on wealth management media, you’ll have noticed a recurring debate over the benefits of passive versus active investments.

Both approaches have their pros and cons and a diverse portfolio might include both — here’s a bit of background to provide some illumination.

Active tradition

Traditional, actively managed funds are run by specialist fund managers and research teams who pore over individual stocks, shares and bonds before picking the most promising assets — then closely monitor the market and buy or sell according to movements in order to maximise profits and protect capital.

• The benefits are a potential return that outstrips the market as a whole — but this depends on a talented manager that makes the right picks and moves your money quickly when the climate changes.
• Critics of active management claim that it’s difficult to be quick on the draw when a market fluctuates and statistically, a significant portion of fund managers underperform against the sector.
• Additionally, because market analysis is time-consuming and requires expertise, fees can be relatively high.

Passive strategy

In simple terms, a passive fund will track and replicate a market like the S&P 500 or FTSE100 — investment can be spread across every stock and performance is pegged to that of the index as a whole.

• One of the benefits of a passive approach is lower fees — the same fine-grain analysis of individual securities is unnecessary, and computers complete investment tasks automatically without sentiment, or applying any tactical decision making.
• Investment is arguably more transparent — you’ll always know which index your cash is invested in.
• Proponents of passive funds claim that they often outperform active funds over 10-year periods.

Best to blend?

Canny financial investment managers often deliver good results for clients with portfolios that blend active and passive investments.

• Passive tactics have their place — but claims of superiority are countered by a study from The Capital Group that shows some actively managed funds outperforming passive over 20- and 30-year periods.
• As passive indexes become more popular, there will be a greater product choice for customers — which might eventually entail a more ‘active’ management approach.
• As an example — if someone stopping work draws money from a retirement fund which is invested into passives, the underlying investment strategy will remain the same both before and after the disinvestment and may involve selling assets where the future prospects are good. Alternatively, a bespoke active fund might incur higher fees, but an astute manager can buy and sell tactically to maximise final returns.

Our approach

We’re happy to chat to any client about which aspects of active and passive investment best suits them — but we normally recommend a spread of investments.

Our own service fees are standardised and we’re completely independent — so we’ll never adopt a one-size-fits-all approach to products.

By listening closely to your requirements and using our expertise to recommend a suitable solution, we’ll provide a bespoke package that suits you to a tee — so there’s no need to bank on a binary decision.

Always Remember

1. The value of an investment and the income from it could go down as well as up
2. The return at the end of the investment period is not guaranteed (and you may get back less than you expected!)
3. Finally, past performance is not a reliable indicator of future results

If you want to chat more about tailormade financial solutions, contact our team today.