by Sam Benstead from interactive investor, 5 July 2023:
When it comes to sales, there has only been one winner in the active versus passive fund battle over the past decade, with the latter cleaning up.
In 2007, before the financial crisis struck, the amount held in tracker funds was a mere £29 billion, which at the time represented 6.3% of the total.
Today, there’s around £300 billion invested in total. This is about 20% of the funds industry, according to trade body the Investment Association (IA), and there are no signs of its share falling as active fund manager performance fails to keep up.
A simple way to understand the difference between active and passive is to think of active managers as trying to uncover needles (good shares) in a haystack (the market). Passive funds, such as exchange-traded funds (ETFs) meanwhile, buy the whole haystack, knowing that the needles are in there somewhere…
Interactive investor customers are big fans of passive investments, with eight of the 10 most-bought funds in June passive strategies. Just Fundsmith Equity and Royal London Short Term Money Market fund made the most-bought list…
However, there are some investment areas that passive funds are poorly suited to and going active is the best way of investing. Investment trusts, which have a permanent pool of capital and can therefore invest in tricky to trade assets, are particularly well suited to active management…
David Johnson, investment analyst at research firm QuotedData, says there are three themes that are “difficult, if not impossible” to achieve via open-ended funds and ETFs.
These are activism, diversified funds that include unlisted shares, and low liquidity small cap. His trust ideas for these three sectors respectively are AVI Japan Opportunity Trust, RIT Capital Partners, and Herald Investment Trust.
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