In my experience, investment solutions populated by active funds often produce less predictable and less consistent fund performance than their passive alternatives. Just because funds can frequently trade to react to prevailing market conditions, it does not mean that they should.
It is not easy for an actively managed fund to consistently outperform the market as a whole, but the increased levels of fees (relative to a passively managed fund) will definitely create a significant drag on the fund’s performance. It is important to always keep an eye on the big picture and remember that we are investors, not speculators. As unfashionable as it may sound, the most consistent method for delivering steady, risk-controlled returns is to choose a low cost, diverse long term strategy and then stick to it.
Philip Bailey is a partner with Assetfirst, a provider of passive investment solutions to the wealth management and IFA markets
Key Points
The biggest advantage of using passives is cost.
In the developed equity markets, there has been a significant underperformance of active funds verses passive.
Perhaps more of a concern than absolute fund performance is the variance in volatility of active funds.
