Should I choose an active or passive investment fund?
Understand the pros and cons of active versus passive investments.
For many years there has been an ongoing debate over whether active or passive investments are the best option for protecting wealth.
Andrew Sheppard, Wealth Advisor, International Wealth and Investment, Standard Bank believes that there is a place for both active and passive investments in an investment strategy. The key is knowing when to leverage the different investment vehicles available to you.
THE BENEFITS AND DRAWBACKS OF PASSIVE INVESTMENTS
A passive investment refers to investing in a financial instrument that tracks an index or benchmark. There are several benefits to a passive investment:
- Investors invest in the fund and allow it to grow while tracking it.
- There is no active management involved, which means that fees are lower.
- Indexing tends to offer broad-based diversification.
- Short-term gains are often higher in passive funds in comparison to active funds.
However, there are some drawbacks to passive investments as well:
- Long-term, passive investments may underperform or overperform the benchmark or index because there is a tracking error in relation to the benchmark.
- Owning an index does not protect investors from short-term volatility or losses if markets experience a downturn.
THE BENEFITS AND DRAWBACKS OF ACTIVE INVESTMENTS
An active investment is managed by a fund manager who makes investment decisions designed to outperform the index or benchmark. There are two main disadvantages to actively managed funds:
- The fees can be higher because the fund is managed, which requires a team of experts and analysts tracking markets.
- The returns are not guaranteed to be greater than those from a passive investment.
However, the advantages of actively managed funds are long-term and enduring:
- The purpose of active investments is to outperform the market.
- Very few active fund managers will outperform the market or benchmark every year, however, over the longer term the blended effect of outperforming the market in some years, while also managing volatility, means an investor has the potential for market outperformance.
- While there are fees involved, these include a team of investment experts who are actively researching long and short-term market opportunities.
According to Sheppard, there is a place for both passive and active investment strategies. He advises investors who are interested in both protecting the wealth they have built and in growing their portfolios further to leverage a blend of both strategies.
- Take the long-term view. Long-term investment strategies that protect wealth and grow portfolios are built on fundamental principles and key investment goals. Active fund managers understand the goals of their clients and ensure that any fund decisions align with these principles and the portfolio’s overall mandate. When the market experiences short-term disruptions, active fund managers take the long-term view to protect their clients’ wealth.
- Align with key principles. Actively managed funds invest in line with the philosophy of the investment manager. When an opportunity is identified, a strategic and tactical allocation of assets takes place for long-term returns.
- Leverage short-term opportunities. When an investment manager identifies a short-term opportunity, a passive fund might be the fastest, most cost-effective and efficient way to gain exposure to the market.
“We believe that there is a place for both active and passive funds for investors,” says Sheppard. “The most important consideration is how investments align with long-term strategies and goals.”
Standard Bank Jersey Limited is regulated by the Jersey Financial Services Commission and is a member of the London Stock Exchange. Standard Bank House, 47-49 La Motte Street, St Helier, Jersey, JE2 4SZ. Registered in Jersey No 12999.
This document does not constitute an invitation or an inducement to engage in investment activity and is presented for information purposes only. Investment should only be undertaken following the receipt of advice from an appropriately qualified investment professional.
The value of investments may fall as well as rise and investors may get back less cash than originally invested. Prices, values or income may fall against the investors’ interests and the performance figures quoted refer to the past, and past performance is not a reliable indicator of future results. Investments may be quoted in foreign currencies and investors should be aware that the changes in rates of exchange may have adverse effects on the value, price or income of the investments.