Active or passive funds?

Actively managed funds rely on exploiting inefficiencies in markets. This is harder to achieve in some areas, especially when investing in the largest quoted companies where there is a multitude of high quality research available.

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EQ is agnostic about the merits of passive funds: if we are not convinced that the extra costs of active management can be compensated by superior performance, we will invest in a low cost passive fund. We also offer a range of ‘passives only’ portfolios to suit clients who want to keep costs down to a minimum.

The benefits of each approach include:

Passive

  • Over the long term most actively managed funds underperform their benchmark. Therefore a passive fund can provide some certainty of above average performance.
  • Some markets, notably US large cap equities are highly efficient and therefore difficult for active managers to exploit anomalies.
  • Passive funds are cheaper and this has a direct impact on performance.

Active

  • Are not confined to investing in the largest companies. Therefore they can seek out great investment opportunities and exploit valuation anomalies in less researched shares.
  • Are able to avoid expensive or hyped up companies and sectors, hence minimising the impacts of ‘bubbles’ such as the tech boom. They can also hold cash (to some extent) if they believe markets are overvalued.
  • Good fund research can identify that small number of fund managers who are capable of delivering long term performance.