The debate about whether a passive or an active investment strategy produces a better return for investors rumbles on.
For you as a client, the method favoured by your adviser can have a major impact on your investment experience, so understanding the two different approaches is important.
Active
An active strategy is one in which the investor – possibly a fund manager or other investment professional – will make investment choices on a regular basis, buying or selling holdings when they think it is necessary, often when they believe they can make a peak profit.
An active strategy is highly involved and requires constant management.
Passive
A passive strategy meanwhile is one which requires hardly any trading whatsoever. Instead, money is invested into funds linked to indexes, such as the FTSE 100, by way of just one of many possible examples.
Relying on the market to make your gain, passive investing is typically seen as a longer term strategy and, although it may sound easier than active from a management point of view, there is still a lot to do in terms of selecting the right funds and creating a well-balanced portfolio of asset classes that meet client’s needs.
Pro-Active
On the active side, proponents claim that such a strategy is the only way to generate better-than-average returns; the only way to ‘beat the market’.
After all, passive strategies, though divested across indexes and asset classes, are by their very design market-linked.
If the index your passive strategy invests in goes up, so will your investments, with the negative being true if the index falls.
Your investment may never outperform the market but it will also never lose more than the market as a whole.
Pro-Passive
Passive proponents, meanwhile, point out that active investment strategies typically cost more in fees, with these fees potentially impacting on the ability of the strategy to produce a better return.
Those who favour passive investments also point out the increased volatility of active strategies, stemming from the higher frequency of investment movements and the timing of those movements, which also produce the potential for market-beating gains.
Our View
There are compelling arguments put forward by both sides to support their case.
The truth is there really is no such thing as “passive” investing. Every decision made (or not made) is an active decision.
We take a mixed approach.
If an active manager can demonstrate consistent long term out performance that more than covers their additional fees we will consider using them.
The sector is important too.
We have to believe that it is realistically possible for it to have happened and continue to happen. Such sectors include emerging markets, UK smaller companies and far east equities.
Often there isn’t a fund or manager that comes up to scratch. Often this happens in the biggest, most liquid markets. UK large and mid-cap equities and US equity would be examples of this. In these cases we use a tracker.