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Active versus passive: how to choose your investment strategy

weatherbys, private-bank

Thinking of dabbling in a bit of fund investing but don’t know where to start? Who could blame you - with a recent study from watchdog the Financial Conduct Authority (FCA) noting that there are 1,840 asset management firms registered in the UK, each offering numerous different funds and styles of investing, the choice is staggering. And, if you don’t know your alpha from your beta, frankly confusing, writes Margaret Taylor in today’s Sunday Herald.

Anyone thinking of buying into an investment fund should first consider their attitude to risk as well as how much they are willing to pay a fund manager to run their money for them. In general terms the more risk you are willing to take on the more chance you have of making a higher return, but equally the higher the chance of you losing money.
 
In truth the chances of losing everything are extremely slim, especially when invested in a fund, which diversifies risk by investing in a range of different assets. Plus, the best managers will know how to spot a company that is on the turn and adjust their portfolio accordingly.
 
Which is where the active versus passive debate comes in.

In its recent interim report on the asset management industry, the FCA noted that passive funds track an index such as the FTSE All-Share by holding securities “in proportion to the market”.
 
“Passive funds offer investors similar levels of risk and return as the market,” the report said. “Actively managed funds often offer investors the chance to ‘beat the market’, albeit with a corresponding risk of underperformance.”
 
The problem is that once their charges have been factored in many active managers do not actually outperform by much and their charging structures can be so opaque that the FCA has recommended they all adopt an all-in fee.
 
“Our evidence suggests that actively managed investments do not outperform their benchmarks after costs and that some active funds offer similar exposure to passive funds, but charge significantly more,” the regulator said.
 
But does that mean investors should shun active funds and invest only in passive ones? Duncan Gourlay (pictured), associate director at Weatherbys Private Bank, thinks so.
 
“We are convinced tracker portfolios will deliver better risk-return outcomes than chasing the latest fashionable manager,” he said.

"Unfortunately, too much of the asset management industry is set up to look after the manager's interest, not the investor's.
 
“The evidence strongly suggests there's no persistence to any temporary outperformance active managers deliver. This means picking managers based on their sales pitch of outperforming is very dangerous for your wealth. If they've outperformed for three years, what happened in the fourth that they don't want to include it in their numbers?”

Read the full story on heraldscotland.com