Active versus passive investing: the decision is not binary
Alex Baily, Portfolio Director, investigates...
The passive market has grown exponentially over the past decade and in recent years, many investment columns have been devoted to the socalled ‘active versus passive’ debate.
Those in favour of actively-managed funds highlight that fund managers can take advantage of investment opportunities as they arise, in addition to those created by market volatility. In contrast, they claim passive funds have little flexibility to ‘swim against the tide’ and therefore guarantee underperformance (after fees).
The passive cohort, however, highlight the reams of academic studies that show a large portion of active managers underperform the market and there is the perennial question of fees.
In our opinion, it is not about choosing one side over the other. We believe the active versus passive debate is outdated because it is not a binary decision to invest in an actively managed fund over a tracker fund, or vice versa. For us, it is simply about selecting the most appropriate investment vehicle that will achieve the best outcome for our clients.
Initially, we make an asset allocation decision such as increasing exposure to a specific part of the market because it looks attractive. We then assess both the active and passive opportunities and carefully analyse the most suitable one for the client depending on their risk profile and objectives.
Finding the right tracker
Making a decision to simply ‘buy the market’ via an Index Tracker Fund or an Exchange Traded Fund (ETF) is not as simple as you might expect.
Like actively-managed funds, passive funds have their intricacies so it is important to look under the bonnet to ensure you understand what you are buying. Here are a few pointers to help with the process:
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