Active approach

David Prosser discusses the benefits actively managed investment companies could offer investors over passive funds. 


There’s comfort in following the crowd, particularly at times of uncertainty and confusion. But when it comes to investment, the herd instinct isn’t always a positive phenomenon. The fact that most people are moving in a certain direction does not mean it makes sense to follow.

That thought is prompted by the latest monthly statistics on fund purchases from investment platform Interactive Investor. In the open-ended fund universe, seven of the ten most popular funds in June were passively-managed vehicles, the platform reports.

At first sight, that makes some sense. Amid market volatility, you can see why investors might prefer to keep it simple with their fund picks. And the low charges on many passive funds offer some reassurance – at least you’re not over-paying for your market exposure in this febrile environment.

Yet there’s a flaw in these arguments. The one thing we know for sure about passive investments is that they will mirror the performance of the markets they track. And when markets are falling, why would you buy a fund that automatically tracks them downwards?

As for charges, surely this is exactly the market environment in which fund manager expertise is worth paying for? You need a specialist to pick a path through this mayhem; paying low fees for a passive approach is a false economy here.

These are arguments that investment company buyers – in contrast to their open-ended fund counterparts – seem to accept. Here too, Interactive Investor’s top ten fund purchases list for June makes interesting reading. It includes four investment companies offering exposure to alternative assets, three funds offering tailor-made diversification, and one outright contrarian buy.

To consider those themes in order, the case for alternative assets such as infrastructure and commodities is a strong one right now. These are assets with relatively little correlation to equity market performance, as well as strong inflation protection credentials. Greencoat UK Wind, Blackrock Energy and Resources Income and BlackRock World Mining all made Interactive Investor’s top ten.

As for the diversification funds – Capital Gearing, Ruffer and Personal Assets – these funds are in some ways the ultimate in active management. Investors pay their managers to build portfolios from across a wide range of asset classes, trusting them to preserve wealth and grow through every part of the market cycle.

As for the contrarian, Scottish Mortgage was the most popular investment company of all last month on Interactive Investor’s list. This former high flyer has had a torrid time this year as the technology sector, in which it is heavily invested, has corrected sharply. Investors now appear to be taking the view that the worst of the sell-offs in the tech sector are over – and that Scottish Mortgage can therefore once again accelerate. You may or may not agree with this view, but what you’re certainly getting here is active management.

None of which is to say any of these investment companies is right for everybody, or that passive, open-ended funds are necessarily to be avoided at all costs. But for many investors and advisers, a more nuanced approach to market volatility makes sense. The investment companies sector offers a whole range of funds that might add some defensive ballast to portfolios.