Savings & Investments Part 6: Active or Passive
Active or passive funds?
With a stocks and shares ISA and with unit trusts and OEICs, you can choose to invest your money in ‘actively’ managed funds or ‘passively’ managed funds.
‘Active’ funds are managed by a specialist investment manager or a team of specialists who, within certain limits, have the freedom to choose which companies to invest in and how much to invest in each company. In this way, investment managers attempt to use their knowledge and experience to beat the returns you could achieve by simply investing in an index, like the FTSE100.
‘Passive’ funds attempt to track the performance of an index. In theory, they buy all of the shares in the index so that the performance should exactly mirror the index. In practice, there are sophisticated techniques and models that allow companies to track an index without directly holding all of the stock and shares in that index
In passive management the process is largely automated and therefore less expensive, so passive funds charge less. Actively managed funds are more expensive, but do aim to deliver higher returns by using the skill and judgement of the manager to ‘beat’ the returns from an index.
The arguments over which approach is better are never ending. Certainly, the best investment managers have consistently outperformed the index for their particular sector, but that’s no guarantee they will in the future. In contrast, the saving in costs by buying a ‘tracker’ is certain and real.
At the end of the day, it’s impossible to say which is the right approach both have their followers and their detractors.