Active versus Passive Management

In this guest post Colin Barrett, Investment Management Director at Brooks MacDonald, kindly sheds some light on investment strategies

There are two main strategies which investors can employ when creating an investment portfolio; an active strategy and/or a passive strategy. In terms of how the assets are managed, the two strategies are polarising, but both have their own merits and drawbacks.

What is the difference?

To summarise active and passive investing; active investment involves utilising the knowledge, skill and experience of a fund manager to try and achieve better returns than a benchmark. Conversely, passive investment generally involves using a tracking strategy to mirror the performance of a particular index, such as the FTSE 100.

There are benefits to each approach. Passive investment strategies generally incur lower charges than active strategies because there is no value-added research and analysis involved with this strategy. On the other hand, active strategies utilise in-depth research and analysis with the aim of capturing benchmark-beating returns. At Brooks Macdonald, we firmly believe in active investment management; with the aim of achieving above-benchmark performance for our clients over the long term.

How does this work in practice?

A passive fund has to invest in the same securities, and in the same proportions, as the index that it tracks. On the contrary, an active manager has a much greater degree of flexibility, as such they can avoid underperforming sectors and capitalise on rising sectors.

A contemporary example illustrates certain benefits of this autonomy; active UK equity managers were recently able to avoid both the mining sector, which has seen large declines over the past year amid concerns regarding China’s economic slowdown, and the energy sector, which has suffered due to the sharp fall in oil prices. Furthermore, active managers have focussed their attention on companies with varying levels of market share – they have invested the capital withheld from the energy and mining sectors in mid- and small-cap UK companies. Such companies tend to be more domestically focused than their larger counterparts and have therefore outperformed as the UK economy has shown improvement.

For more details and contact information for Brooks MacDonald visit our Partners page.

Published by Simon Crooks 15th January 2016