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Active vs passive - how to find the right balance

Are actively managed funds or tracker funds best for investors? This debate has split the experts for decades.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Are actively managed funds or tracker funds best for investors? This debate has split the experts for decades. Passive investments, like tracker funds, try to match the performance of an index and are normally lower cost. Active funds try to beat the index, though charges are higher to reflect the work involved.

We think both active and passive investments have a place within a balanced portfolio.

In some cases, the choice between active management and a tracker is clear cut. In certain sectors there are very few, if any, tracker funds to choose from. Plus it’s easier to find high-calibre active managers in some sectors.

Below I look at four popular sectors and explain whether I think an active fund or a tracker fund could be the better option.

This article is not personal advice. If you are unsure of the suitability of an investment for your circumstances please seek advice. All investments can fall as well rise in value so you could make a loss.

UK All Companies

Despite Brexit and other political uncertainty, the UK is home to some outstanding companies. From those that have been doing business at home and abroad for centuries, to smaller businesses with the potential to be the giants of tomorrow. This provides a rich hunting ground for UK investors. We think the UK is home to lots of skilled fund managers, many with a long track record of outperforming the broader UK stock market.

Fund in focus - AXA WF Framlington UK

Chris St John has managed the AXA WF Framlington UK Fund since launch in April 2016 and is one of our favourite UK fund managers. He’s proven, well-incentivised and has the freedom to invest across large, medium-sized and higher-risk smaller UK companies. He benefits from the support of a well-resourced team and other fund managers at AXA.

Chris St John identifies themes, and invests in companies he thinks will benefit as the theme develops. Current themes include companies that use technological innovation to win business from competitors.

Online travel agent On the Beach is an example. The company’s competitors include Thompson and TUI. Both businesses own fixed premises and spend a lot of money on staff. On the Beach is an online-only business. This means its costs are lower and it can charge lower prices to its customers. This helps it to win business from the competition.

Please note that as this is an offshore fund investors are not normally entitled to compensation through the FSCS.

Annual percentage growth
Aug 13 -
Aug 14
Aug 14 -
Aug 15
Aug 15 -
Aug 16
Aug 16 -
Aug 17
Aug 17 -
Aug 18
AXA WF Framlington UK N/A* N/A* N/A* 18.5% 5.6%
FTSE All-Share 10.3% -2.3% 11.7% 14.3% 4.7%

Past performance is not a guide to the future. Source: Lipper IM to 31/08/2018

*Full year data before April 2016 is not available for this fund.

More Info

AXA WF Framlington UK KID

Europe

Europe is one of the most diverse regions in the world. It spans from Norway and Sweden in the north, through to Spain and Italy in the south. It’s all too easy to focus on the political and economic challenges in Europe, but in doing so, you could overlook the region’s high-quality businesses. We think we have found a few talented fund managers who have made the most of these opportunities to outperform the European stock market over the long term.

Fund in focus - FP CRUX European Special Situations

Richard Pease, manager of the FP CRUX European Special Situations Fund, has built a three decade-long career investing in Europe. And his approach hasn’t changed throughout. He looks for world-class businesses that may have originated in Europe, but are internationally competitive and operate on a global scale. He tries to invest in those that generate a lot of cash and have high barriers to entry from competition. That means they have the potential to prosper in both good and bad times for the wider economy although of course there are no guarantees.

The fund has delivered growth of 181.0%* since launch in October 2009, compared with 107.0% for the benchmark, although past performance is not a guide to future returns.

You should note the manager can invest in smaller companies which are higher risk than bigger businesses. Plus he tends to invest in quite a small number of companies, which increases risk further.

Annual percentage growth
Aug 13 -
Aug 14
Aug 14 -
Aug 15
Aug 15 -
Aug 16
Aug 16 -
Aug 17
Aug 17 -
Aug 18
FP CRUX European Special Situations 4.0% 8.7% 27.1% 21.9% 2.0%
FTSE World Europe ex UK 10.4% 1.3% 15.4% 26.0% 1.4%

Past performance is not a guide to the future. Source: *Lipper IM to 31/08/2018

More Info

FP CRUX European Special Situations KID

Global

In the global sector, we tend to find fewer high-quality active fund managers. Managers that do outperform often invest in relatively few companies and their portfolio won’t necessarily be exposed to all areas of the global stock market. So an actively managed global fund could be less diversified than you might think.

That’s why we feel a mix of active and tracker funds could be the answer. One of our favourite tracker funds for exposure to worldwide stock markets is the Legal & General International Index Trust. The fund invests across most major markets, excluding the UK, and in more than 2,350 companies. It tries to track the FTSE World (ex UK) Index.

Please note this tracker also invests in emerging markets which are higher risk than developed ones.

More info

Legal & General International Index KID

North America

The US accounts for more than half of the global stock market and is home to companies that dominate their field. It’s also one of the most heavily researched economies in the world, which means the stock market reacts quickly to new information. That makes it difficult for active fund managers to consistently outperform the US stock market.

Even so, we believe most diversified portfolios should have some exposure to US shares. Our preferred way to invest is the Legal & General US Index Fund, which tries to track the FTSE USA Index – a broad index of more than 600 large and medium-sized US companies.

More info

Legal & General US Index KID

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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