Active or passive investing? This is a question often asked by investors when it comes to picking what funds to include in their portfolio.
However, one fund manager has indicated that it needn’t be a case of either/or, and rather passive and active investing can complement one another:
James Bateman, Head of Multi Manager & Multi Asset Portfolio Management in Fidelity’s Investment Solutions Group, highlights the some of the things investors should consider when deciding on which strategy to use.
Equities
“Active management generally makes a lot of sense in the equity market. Indeed, in Asia and emerging markets, it is widely considered the preferred option. Because markets are less efficient (and liquidity constraints can mean passive strategies can struggle to fully reflect indices), active investment strategies can add real value in these markets. Even in developed markets, though, bottom-up stock picking can identify promising companies that offer potential for outperformance over time compared to passive strategies.
“Of course in some markets, investors could opt for low cost, passive strategies. Funds focused on US larger companies, for example, often struggle to beat the S&P 500 index, so products like BlackRock North American Equity Tracker or Fidelity MoneyBuilder US might be good choices.”
Fixed Income
“We shouldn’t forget that active management can be useful across all asset classes – not just in equities. While many investors choose passive vehicles for investment in government bonds (where it can be difficult to add value) active management can be effective in searching out the winners among the vast array of corporate bonds available.
“The M&G Strategic Corporate Bond Fund is a good example of this, since it takes a fundamental approach to identifying value in corporate bonds.”
Active and passive: better together
“This period leading up to the ISA deadline is perfect for re-thinking the balance of portfolios. Adding actively managed funds could be a wise move for many savers looking to make the most of their money in new markets and changing economic conditions. Don’t forget that the benefits of even small amounts of outperformance compared to a passive strategy can add up to considerable differences in returns over ten or more years.
“Active and passive strategies carry different risks, different costs and different benefits – which is why they can complement each other as part of a balanced portfolio, and why investors must take the time to understand the pros and cons of each.”
