For most clients investing directly into individual shares carries too high a risk, so collective investments are more suitable because this is a means of spreading the risk
However, once you look at the selection of collective funds you are faced with huge choices, which fnd should you choose and will the manager you have selected outperform the market
You can choose to buy a passive fund which simply tracks an index, this can be an OEIC or ETF and the cost of these funds is low. However, the return you will obtain can never be greater than the performance of the market it tracks, in some cases it will be slightly less. If you choose an actively managed fund you will pay more but you will hope that the manager will out perform the market.
There is a constant argument about the validity of active funds versus passive funds.
What is best for you?
An active fund is a fund which is managed on a day to day basis with the manager establishing an asset allocation and buying stock to suit the aims of the fund. For this activity the investor pays an up front charge. This is fine if the manager outperforms the benchmark index. However, in many cases statistics show that the average manager does not outperform his benchmark index and therefore the investor would have been better off buying a tracker fund.
The Tracker fund needs no fund manager because the portfolio in some way reflects the index which is being tracked there are a number of ways of doing this including full or partial replication. The costs of this type of fund is less because no fund manager is employed but the downside is that in certain market cycles the index selected may not perform well whereas an active fund manager, running, say a Recovery Fund will outperform a Tracker fund.
The answer to the conundrum may be to hold passive funds as a core holding but add selective active managers to increase the Alpha performance of the portfolio.
At Nicholls Stevens we construct portfolios for clients which often hold both types of funds, passive as core funds, an active fundsin the less developed markets or specialist areas