In a volatile market, like the one we’re currently seeing, management of investments stokes quite a bit of debate, especially the relative merits of active versus passive management. Michelle McGrade, Chief Investment Officer at TD Direct Investing, has explored the merits of both routes to see how investors can benefit and identify which route might be best for them.
What is passive management?
Passive management is where the fund manager replicates the index; therefore the performance of the fund usually matches the index return.
The advantage of passive management is that the funds are cheaper to buy and investors do not need to worry about assessing manager skills.
There are two ways to buy passive funds, one through the fund route and the other through Exchange-Traded Funds (ETFs). ETFs are usually the cheaper and more flexible way to invest in an index because they are traded on a stock exchange, whereas the funds are traded daily.
What is active management?
Active management is where a fund manager uses his skill to manage the fund. Usually the success of the fund manager’s skill is measured relative to the relevant market index.
They are free to choose to invest in companies where they see potential and they can avoid troubled companies and sectors. Additionally, they are well positioned to react and buy into companies when their research indicates that a particular company’s fortunes are recovering or improving.
Get active in the UK
To my mind, there is merit in using both – depending on where you want to invest. However, when investing in the UK, I strongly advocate choosing active managers over passive.
There is evidence to support this because over the last one, three and five year periods, around 75% of British fund managers have outperformed the FTSE All Share. This has materialised because the dominant industries such as oils, mining, some heavy industrials and banks, have been battered and are masking the good performances we are seeing from other companies; such as consumer products like food and leisure, healthcare and house builders.
Source: Bloomberg
The chart shows the best and worst performing sectors in the FTSE All Share Index year to date, up to and including 30th September 2015
It is interesting to note that the top 10 companies, which is dominated by HSBC, BAT, Glaxo, BP, and Shell, represents 30% of the FTSE All Share; which is comprised of 647 companies. So you can see how their fortunes/misfortunes dominate the returns of the index.
Some of our Recommended Funds
We have recently added more active managed funds to our Recommended Funds list to give you more choice. Here is a mix of funds managed by veterans, who have strong, long-term track records and have seen many different market conditions, and up and coming managers with shorter track records who we think are hungry and determined.
Veterans:
Liontrust UK Smaller Companies
Up and coming:
The post Active Vs passive and the UK appeared first on News and Views.