Active vs passive investment management
There are two main investment management strategies that investment managers and advisers can employ on behalf of their clients: Active or passive management:
- Passive investment management aims to maximise the investment performance of a diversified portfolio via cost minimisation.
- Active management aims to maximise the investment performance of a diversified portfolio via superior investment selection and timing
Please explain passive investment management in more detail
Passive investment management usually involves the purchase of a low cost investment fund which aims to replicate the composition of stock and commodity indices such as the FTSE 100, the CAC 40, the S&P 500, MSCI World etc. For example, the S&P 500 is a list of the top largest 500 publicly listed companies on the New York Stock Exchange (NYSE) and the NASDAQ. You can see why the relative security of investing into these larger companies appeals to investors as larger companies are generally less riskier investments than smaller companies (but with a generally lower potential investment return). In order to invest into these indices, investors often use Exchange Traded investment Funds (ETFs) but you can also have a perfectly fine passive investment strategy via regular mutual funds. The attraction of this strategy is because the investment manager seeks to simply replicate the composition of these indices, they are a lot cheaper to run and therefore their annual management fees are lower than actively management funds.
Please explain active investment management in more detail
Active investment management involves an investment manager actively trying to better the performance of the fund’s benchmark, typically a stock-market index or an index of similar investment funds. These funds cost more per year in annual management fees but the aim is to beat the performance of the fund’s benchmark net of fees, so that the investor has an overall net benefit. The investment manager can aim for superior performance by making well-timed investment decisions based on research and analysis, for instance: selling an investment before the price goes down or purchasing one before the price goes up.
So which is better, active or passive investment management?
There is no factual or simple answer to this question. Academic research has shown that on average, active managed funds fail to beat their passive managed benchmarks, however, some fund managers have a demonstrable track record of over 5 or 10 years of beating passive benchmarks. One of the jobs of a financial adviser is to research the best and most suitable funds for their clients, but some financial advisers will only recommend passive funds whereas others will only recommend active funds.
What is the approach of Aisa International?
This partly depends upon the client, we have access to thousands of external passively and actively managed funds and portfolios, as well as our own in-house active and passive portfolios. It also depends upon the funds available with the specific investment product provider or insurance company. Actively managed funds sometimes involve more risks, such as the risk that a star fund manager will leave the company, or the considerable risk of human errors leading to worse performance for a higher price. However, actively managed funds can also help you to achieve your financial goals more quickly if they are able to beat their passive index benchmarks. Actively managed funds are not always riskier than passive funds, many will actually be less-risky if the fund manager is pessimistic about future stock market performance. Academic research also supports some active management strategies. Passive indices are also not available for every asset class and are sometimes less diversified than actively managed funds.
Is there a third-way?
Yes, hybrid active-passive investment strategies also exist, which usually involve a mostly passive strategy with the addition of some active management strategies. For instance, a fund manager could invest into a portfolio of passively managed funds, with larger weightings to some countries or economic sectors. It is not always a question of simply active vs passive investment management.
Useful links
- https://aisainternational.fr/investments/british-in-france-how-aisa-international-can-help-you/
- https://www.rathbones.com/sites/rathbones.com/files/literature/pdfs/rathbones_active_vs_passive_investing_james_pettit_investment_report_full_website.pdf
- https://www.investopedia.com/news/active-vs-passive-investing/
The views expressed in this article are not to be construed as personal advice. Therefore, you should contact a qualified, and ideally, regulated adviser in order to obtain up-to-date personal advice with regard to your own personal circumstances. Consequently, if you do not, then you are acting under your own authority and deemed “execution only”. Additionally, the author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Importantly, this article is dated and is based on legislation as of the date. It should be noted that legislation changes, but articles are rarely updated. Sometimes a new article is written; so, please check for later articles. Additionally, check for changes in legislation on official government websites. Finally, this article should not be relied on in isolation.
