Active or Passive fund management

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It is a topic that divides the investment community, whether trust a team to pick the best companies to outperform the market, or just track the market and hope it grows.

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Just like asking people if they prefer apple or android, you will always get someone who is passionate about one or the other but never seemingly both.

Passive funds are investments that will track a particular index, whether that be as broad as the ASX 300, like Vanguards VAS does, or something as bespoke as ESPO which tracks the main players in the e-sport area (covering the likes of NVIDIA, Nintendo and Electronic Arts to name a few).

We have seen huge growth in the index fund area and now it is basically to the point that if you can think of a particular market segment, there is an index fund you can invest in to match.

One of the other advantages of Index funds is their low cost, due to them not actively trading or trying to outperform their fees are incredibly cheap in comparison to their active counterparts.

Active funds are where a fund manager is actively trying to pick the best companies in a bid to outperform the market. Apart from a few geographic and sector profiles, the main choice you have in regards to active fund manager selection is Growth or Value, and that refers the fund managers stock picking philosophy. 

Growth fund managers are looking for companies that are gaining market share, and have a competitive advantage over its peers. A good one was domino’s which seems to have dominated the market through COVID and is now the market owner compared to Pizza Hut.

Value fund managers are looking for high quality well established companies with low debt positions and strong equity, they are the tried and tested companies that traditionally have stable share prices and consistent dividends.

Below is an image of the performance of two active fund managers, one focused on Australian growth companies, the other on value, and Vanguards VAS added in to the mix.

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You can see a clear outperformance of Growth stocks compared to both value and the index, but we saw the index outperform the actively managed value fund manager aswell.

Active fund managers do come at a premium compared to their index counterpart, so it is possible that you could end up paying for underperformance when selecting active fund managers.

If you want help designing an Active or Passive investment portfolio, or would just like to know more about the options please book in for your complimentary meeting.

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