Investing funds for your future can prove to be a minefield for those who do not take suitable advice. Chapters Financial hope that through our informed processes, we are able to educate enquirers in investment planning and what can be achieved and possibly, more importantly, which investment styles can be used. As an example, some investors are not aware of the difference, or even the existence, of active and passive investment funds. You may have spotted the long list of funds listed in the financial sections of the weekend newspapers and the Broadsheets during the week.
So what are these active and passive funds and what might you want to consider?
• What do they do with your money?
• How do they differ?
• How can their performance be measured?
Active Fund examples
Active funds are, as the name suggests, actively managed by professional fund managers who make decisions on the individual holdings within the overall fund.
Invariably, they will be buying, and selling, different shares / gilts / commodities / etc. based on what they believe to exhibit the most, or least if selling, value at the time within their chosen sector. It could be suggested that you are effectively buying the expertise, skill and experience of fund manager’s team you are investing in, along with the assets of the fund. You are paying for this skill, expertise and experience within the fund’s Annual Management Charge (AMC/ known as On-going Charge in many investments). Investments are usually made for a return and the payback you wish to see for your decision is that your investment return is good (and some ‘benchmark’ their return against a corresponding index for comparison purposes). This benchmarking should demonstrate that the fund, and correspondingly the investment fund manager, is outperforming its peers (or not) within the marketplace.
Passive Fund examples
Conversely, passive funds are not (as you may have already guessed by now) actively managed.
They usually aim to track an chosen index, or benchmark, by being invested in a ‘basket’ of holdings which are designed to closely replicate the index, or benchmark, to varying degrees of accuracy depending on the type of passive fund. This ‘basket of holdings’ (usually unit holdings) is not changed unless the index, or chosen benchmark, is changed. One example of an index is the FTSE100 which is comprised of the top 100 leading companies listed on the London Stock Exchange (LSE). A FTSE100 Tracker Fund will buy shares in the FTSE100 companies and it will be unlikely to amend the basket of FTSE100 company shares unless certain companies fall in and out of the FTSE100 list. Due to less analysis, fewer transactions, minimised administration and reduced manpower required for passive funds the Annual Management Charges (AMC) tend to be lower than the Active funds noted above.
Benchmarking
Some investors prefer to have a measure to judge performance of their fund against the area they are targeting, such as Growth or a Stock Market, such as the FTSE, as examples. For Private Investors, one reasonable tool that can be used is APCIMS (Association of Private Client Investment Managers) FTSE benchmarks. There is a range available and a link to these can be found below:
http://www.ftse.com/Indices/FTSE_APCIMS_Private_Investor_Index_Series/index.jsp
Which to go for?
One question often posed is ‘why not just buy passive funds only to keep costs down you may ask?’
Although the costs of fund management are important and should be considered carefully, the answer is reasonably simple. If you are trying to achieve better returns than a chosen index or benchmark, then passive funds are highly unlikely to ever achieve this index return. Why? Due to the fact that the index, or benchmark, will not be reduced by the Annual Management Charge made to your fund and therefore the index return should always be greater.
It could then be suggested that the higher charges applied by an actively managed fund will require the investment to work harder to achieve the same return achieved in a passive fund/investment. There is some mileage in this argument, but without the constraints of an index to adhere to, this usually gives the manager a greater range and flexibility of investment choices. Some would argue that smaller funds can be more agile than larger funds, but without being tied to a (potentially) restrictive index, the scope of the manager for investment and, most importantly, returns should be increased.
Chapters Financial usually prefers actively managed funds, however a mixture of both active and passive funds can be used to great effect to generate capital growth (or income or both) depending upon the clients risk profile, objectives and timescale. Benchmarking, as noted above, may be a way of way of helping measure the success of this investment planning strategy.
Investment is about clients’ needs and desires for their money and its future. Any financial/investment planning should be based on your objectives and attitude to investment risk. For reference, an Investment Risk Schedule can be found on the Chapters Financial website
here.
As you would expect, no individual investment/planning advice has been provided during the content of this Blog. This is because each client’s needs are individual and so is their planning. Chapters Financial Limited would be pleased to help you with your investment planning, in all its many formats, into the future, continuing to provide the independent financial advice (IFA) into 2013 and beyond.
Past performance is not a guarantee of future performance. Fund values can fall as well as rise. Chapters Financial is not responsible for the content of external Website links.
Simon Hewitt BSc (Hons) DipPFS, Financial Planner
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.
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