Active vs. passive investment - the endless debate

The predominant investment strategies today are active and passive management, and there’s plenty of arguments for both. Let’s take a closer look at the definitions and what they entail:

  • Active funds are run by professional fund managers who have extensive access to market research and make the investment decisions on your behalf. They build a portfolio by selecting the assets (stocks, bonds, etc), and seek to outperform the market.
  • Passive funds (ETFs, unit trusts or open-ended investment companies) involve tracking an index, such as the FTSE 100, or a market. Passive funds give a return that reflects how the market is performing, rather than trying to outperform it.

The biggest advantage of passive funds vs. active funds is the cost. Passive funds can cost as little as 0.15% compared to the 0.9% for an active managed fund.

Before you decide on the type of investment strategy you want to take, it’s important to understand the research: it shows that active funds performance hasn’t necessarily been top-notch. According to the Financial Times “almost every actively managed equity fund in Europe investing in global, emerging and US markets has failed to beat its benchmark over the past decade, raising more questions about the value stock picking managers add”. And, in the opinion of Moody’s, a leading financial services company, the higher fees charged by actively managed funds are “more noticeable and impactful to investors” in the current low-yield environment.

Looking at the graph below, you can see how consistent the net outflows from traditional actively managed mutual funds into lower-fee passive investment products have been since 2007. Passive investments now constitute approximately one-third of the market and are likely to continue to grow.

Source: Moody’s Investors Services.

In short, before deciding on a strategy, look at the details and returns of the fund and the fees you will be paying. Happy investing! 

 

Credit photo: Giphy.