When searching for the right fund to invest in, you may find that some of them are described as ‘Actively’ managed whilst others are ‘Passively’ managed…what the hell does that mean?
Active
An active fund will have a manager and a team of highly skilled analysts who’s job it is to decide what and when to buy or sell. The idea is to try and beat the market – you know, buy low, sell high – that sort of thing.
The problem is that study after study has shown that there isn’t a reliable way to continually pick fund managers in advance who will beat their benchmark or market consistently.
For example, this study from Cass Business School found that of 516 UK equity funds between 1998 – 2008, only 1% of fund managers were able to produce sufficient extra returns to justify their costs.
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That equates to a one in a hundred chance of finding a fund manager that would add enough value to justify paying their fees over that time-period. (Those are poor odds!)
So, what’s the alternative?
Passive
Rather than paying high fees for a sharp suited fund manager to try (but probably fail) to beat the market, why not just buy the market itself?
Passive funds come in many different flavours, but they essentially try to replicate market returns by using largely automated systems. This reduces costs.
But ‘passive’ is such a dull term though isn’t it? Maybe they should call it something a bit sexier to help market it a little better. How about; ‘The Skynet investing methodology’? Beautiful, I LOVE it!!
Summary
Despite the evidence, active management remains the dominant investment strategy and there is a good reason for this too – sexy marketing! You see, the fund management industry is enormous and well-established, with a lot of money to throw at marketing.
Furthermore, a lot of old-school Financial Advisers have peddled active management for years! It’s not their fault entirely though, it’s what they’ve always done, and the industry has brainwashed them, too. Active fund management is also a much easier concept to sell to prospective clients because we all love the idea that some clever bloke in London will get us better returns. The evidence does not support this!
Fortunately for my clients, I am a disciple of Evidence based investing.
If you have any thoughts on this weeks’ topic, hit me at planning@claritylfp.co.uk
Have a great week.
Until next time…
(Investments can go up or down and there are no guarantees. Past performance is not an indication of future performance. You may get back less than you invested).
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