Active or passive?

Where do you stand on the active versus passive fund debate? Is it worth paying extra for an actively managed collective investment vehicle which may or may not beat the market? Or should you simply lock into the average market performance – even if that means a guaranteed loss in down years for equities – through a cut-price index tracker?
 

There’s no right answer, of course. Investors and advisers take different views for perfectly legitimate reasons – and many think it makes sense to have both types of fund in a portfolio. Even so, that still leaves the question of where you get your passive and active exposure; and in this context, some new data from the investment platform AJ Bell makes interesting reading.
 

It crunched the numbers on the most popular funds with its investors over the past year. Amongst open-ended vehicles, eight out of the 10 most frequently bought funds were passively managed in one way or another. With investment companies, every single one of the top ten was actively managed.
 

The latter statistic shouldn’t surprise us – there aren’t any passively managed investment companies, so investors couldn’t have bought one even if they had wanted to. But the fact investors largely shunned actively managed open-ended funds is more significant; on that side of the collective investment industry, they very much preferred the index-tracking approach.
 

What we have here, in other words, is a split, with different fund structures serving different purposes for many investors. If you want a no-nonsense tracker fund in your portfolio, you’ll find a decent option in the open-ended universe. But if it’s active management that you’re after, maybe investment companies are a better place to start your search.
 

That makes sense. Most comparisons of the two structures reveal that when you look at active funds investing in similar pools of assets, it’s investment companies that tend to perform best over the medium to longer term. They have certain advantages that help with that – notably, the ability to take on gearing, which helps when markets are rising, but often lower charges too. The structure of an investment company, with a fixed pool of assets, is also useful, since managers don’t have to worry about inflows and outflows of cash.
 

It's also the case that investment companies have a long track record of innovation, offering investors a route into specialist asset classes that is simply not available anywhere else. Data from rival platform Interactive Investor reveals that the list of the top 20 performing investment companies in 2022 so far is dominated by these vehicles – from funds offering investors exposure to aircraft leasing to those with renewable energy assets and holdings in the credit market. If you’re looking for a fund that invests in one of these more specialist areas, an investment company may be your only option.
 

This is not to suggest investment companies don’t also offer more traditional types of portfolios. AJ Bell’s list of popular funds in 2022 includes a number of more generalist vehicles – the likes of Monks Investment Trust and JPMorgan Global Growth & Income, for example. Again, these are actively managed funds aiming to add value over what the market will deliver.
 

It's possible AJ Bell’s top tens for 2022 are a vision of the future. Clearly, there are still good actively managed open-ended funds out there – indeed, some of them sell in large numbers. But as the playing field between open-ended funds and investment companies has levelled, so people have started to depend on the latter more heavily for their active exposure. And that trend looks set to continue.