The big fund debate: When it pays to go active

GOVERNMENT proposals last week that £85bn of assets controlled by local authority pension funds be switched to passive index trackers have intensified the debate over the value of active managers and the fees they charge.

Some experts take a “passive where possible” approach, dismissing the ability of fund managers to outperform on the back of greater access to information or knowledge. “I struggle to think of many circumstances when active is better,” says Ben Smaje of Kennedy Black Wealth Management. Commercial property is one such example. He favours bricks-and-mortar funds. “They offer more diversification than funds investing in the stocks of property companies”, which cannot be accessed via passive vehicles.

James Robson of Plutus Wealth, meanwhile, would opt for an active approach for more specialist sectors. “There are big differences, for example, in buying an index that tracks gold, versus gold mining companies.” Further, many experts prefer active vehicles when investing in Asia and emerging markets. “Managers like Angus Tulloch of First State Asia Pacific Leaders can focus on businesses that protect investors from the volatile nature of those markets,” says Adrian Lowcock of Hargreaves Lansdown.

Ultimately, a passive portfolio is lower cost and lower maintenance, so may be better suited to inactive investors. “If you’re not interested in investing, but appreciate the long-term benefits of being in the market, passive funds are a good option,” suggests Rebecca O’Keeffe of Interactive Investor. On the other hand, investors who are engaged and interested in the markets and their investments will find individual shares are highly appealing – and active funds far more compelling.