Are rewarding investment returns passing you by?

If no one is actively managing your investments, fast-changing market conditions could result in under-performance

It is a dilemma that, in truth, may never go away. Is it better to invest your money into a passive fund, with lower costs; or should you pay more to invest into an actively managed fund, in the hope of achieving stronger returns? 

A passive investment fund typically involves your money being invested into one equity market – such as the UK FTSE 100TM Index – and subsequent returns are entirely linked to its performance. In contrast, actively managed funds involve a pro-active fund manager or team implementing and overseeing an investment strategy, which fits within certain risk and reward parameters. 

Unlike a passive fund seeking to track a particular index, many active fund managers invest across the full range of asset classes – including property, cash and fixed interest – to try to boost overall performance.

They also have the flexibility of making quick changes, to make the most of market opportunities they identify and to protect the value of your investment when certain assets under-perform.

As an example within equities, heavy stock market volatility in 2011 prompted global market falls that impacted negatively on investors’ returns. Actively managed fund managers retained the ability to reduce their fund’s exposure to under-performing areas – such as banking and mining – in favour of other sectors – for example, pharmaceuticals – which delivered stronger returns. 

If you held investments in a passive fund, your money could have been left fully exposed to these equity market falls. You might need to decide whether to switch to an alternative fund then switch back later – but by doing so you risk missing out on strong returns from the original fund if the index it is linked to starts to rise again. Meanwhile, an active fund manager can quickly change its holdings back and forth, to benefit from upturns. 

Costs are an increasingly important consideration in this difficult economic climate, and so the cheaper investment option might look more tempting. An active manager will charge approximately 1.5pc per year – with the costs of a multi manager fund typically being higher. Meanwhile, passive funds typically cost around 0.5pc per year. 

Yet when it comes to the latter, there are other considerations aside from the costs. You may want to manage your investments yourself, which will take up more of your time. If the fund you are invested into under-performs, it will be up to you to determine if it is better to switch your money to a different fund. If you feel you do not have the expertise and confidence to consistently make such decisions, the lower cost of a passive fund may not be suited to your needs.