Personal Investing
Emma-Lou Montgomery, Fidelity Personal Investing 23 Feb 2017 03:04pm

Are active or passive funds better for my ISA?

SPONSORED FEATURE: When you invest in funds for your stocks and shares ISA, as well as choosing which sectors or geographies you want to invest in, you have to decide whether to opt for an active or passive investment approach. But what exactly is the difference and why would you choose one over the other?

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Caption: How you choose to invest can make all the difference to the returns you get.

Actively-managed funds are, as the name suggests, run by a fund manager. He or she will decide what to invest in and how much of the fund to invest in a particular stock, sector or country. They will also keep an eye on wider economic and political events that have an effect on stock markets and could affect investments within their fund.

The aim of these fund managers is to deliver the best returns they can. That might mean beating the rest of the market, or for funds with a more conservative investment strategy that might mean protecting capital and losing less value when markets fall.

Passive funds are very different. Rather than being actively run by a manager, whose aim is to beat a particular sector or index by actively choosing stocks they believe will beat those returns, passive funds are designed to simply emulate or track that index instead. That’s why you’ll often hear them referred to as index or tracker funds, as well.

Tap into a world of expertise

Why so many people choose to invest in actively-managed funds is because of the potential they have to deliver far superior returns than a simple tracker fund. If they get it right, an active fund manager offers the potential for far higher returns.

And that is largely down to the experience and expertise of the manager running the fund. It’s fair to say that few, if any, private investors have the time or the skill to deliver the sort of returns they would really like.

As well as having years, if not decades of experience, the fund managers and their teams dedicate a large part of their time getting to know the companies they invest in. As well as analysing them and comparing them to other companies in their sector, they will often make regular visits to see how the company operates first-hand and get to know the senior management teams.

As a private investor, with your own day job to do it’s impossible to find the time to immerse yourself in the stock market and the wider world of investments to the extent that fund managers are able to do on a daily basis. And don’t forget the years of experience they also have behind them. Expertise on that sort of level is not something most private investors can ever hope to achieve.
Ready to get active?

Of course, it’s entirely your choice, but some areas of investment lend themselves more to active management than a passive approach. Investments in emerging markets benefit from the sort of in-depth local knowledge that a fund manager can tap into and property funds, which buy commercial properties and pay returns based on rental income and increases in the capital value of the properties in a portfolio, simply cannot be emulated by a straightforward tracker fund.

Like emerging markets, an active manager can prove their worth in all sorts of more specialised areas, such as technology, healthcare and smaller companies, where expert knowledge can help them seek out under-valued stocks and areas that other investors just haven’t caught on to yet.

A wealth of choice

With more than 2,000 actively-managed funds and 100 passive funds listed by the Investment Association, choosing funds that are right for your portfolio is not an easy task. Our Select 50 range of preferred funds makes the task easier though, by giving you a short-list of 50 funds across a wide range of sectors, geographies and asset classes. So whether you want to invest in FTSE 100 blue chips, US small caps, Japanese equities or emerging markets, gold or property, or a mix of all of the above, you can.

Don’t forget fees

Of course all that experience and expertise that you get from a fund manager doesn’t come for free. And one of the biggest drags on the performance of your ISA can be the costs involved with investing. For the privilege of investing with an expert fund manager, you have to pay higher fees than you would with a passive investment fund. The typical ongoing charge figure for an actively managed fund is 0.85%, rising to 1% in many cases; by contrast, passive funds can be held for as little as 0.1%.

However, there are ways to cut costs without hampering your investment outcome. Many of the funds in our Select 50 are offered at a discount, meaning you get the same expertise for less.

Emma-Lou Montgomery, Fidelity Personal Investing

Emma-Lou Montgomery

Emma-Lou is an experienced financial journalist with over 20 years’ experience working in the national and online press.  The former editor of Shares magazine and Moneywise and editor-in-chief of Interactive Investor, she has also worked for The Telegraph and the Evening Standard, Bloomberg Business News and BBC Radio 5 Live.

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Important Information

The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Eligibility to invest into an ISA and the value of tax savings depends on personal circumstances and all tax rules may change. The Select 50 is not advice or a recommendation to buy or sell funds. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. Investments in small and emerging markets can be more volatile than those in other overseas markets. Some funds invest more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies. Some funds in the property sector invest in property and land. These can be difficult to sell so you may not be able to cash in this investment when you want to. There may be long delays in acting on your instructions to sell your investment. The value of property is generally a matter of a valuer’s opinion rather than fact. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.

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