The great investment debate: Should you put your money in active or passive funds?
The great investment debate typically pits passively managed funds against their actively managed counterparts.
Passively managed funds give investors low-cost risk exposure without the added worry of assessing a fund manager's skills, while actively managed funds come with fees, which eat into their overall returns, but allowing fund managers to trade through market volatility to weather storms like the collapse in commodity prices since the middle of last year. Industry consensus veers towards using a mix of the two.
For anyone considering buying an actively managed funds, Michelle McGrade, chief investment officer at TD Direct Investing, recommends focusing on the UK market over a 10-year period.
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"There is merit in using both, depending on where you want to invest. In markets such as the US, where it is often notoriously difficult to beat the index, a passive approach can work well," McGrade said.
But when investing in the UK, where there is considerable stock concentration and the 10 largest companies represent 30 per cent of the FTSE All Share index, McGrade strongly advocates choosing active managers over their passive counterparts."
Data from investment research provider Morningstar suggests over the last decade, active fund managers across the UK all companies, UK equity income and UK smaller companies sectors have outperformed their respective benchmarks.
And in the UK smaller companies sector, 94 per cent with a 10-year track record outperformed their benchmark over that period.
| IA Sector | Benchmark | Funds with 10-year track record | O/P benchmark over 10 years | % |
| UK All companies | FTSE All share | 182 | 104 | 57 |
| UK Equity income | FTSE All share | 46 | 33 | 72 |
| UK Smaller companies | FTSE Small cap, excluding investment trusts | 34 | 32 | 94 |
| Total | 262 | 169 | 65 |