18 – PROVIDER SUPPORT
Adrian Gasper Multi Asset Investment Specialist, M&GPrudential
ACTIVE AND PASSIVE FUNDS
THE ROLE OF ACTIVE FUNDS
Core to a portfolio Where portfolios are not exclusively made up of active funds, they will often have significant core holdings invested in them, blended with passive funds, structured products and possibly ETFs and investment trusts. However, advisers should take into consideration the fact that the time, resource and expertise required to research, understand and be able to blend all of these investment types may be prohibitive. As a specialist play Many advisers who take a passive approach to investing may still use active funds to invest in specialist asset classes, to fulfil the output from an asset allocation tool, to access a particular fund manager or simply to adhere to a client request. Several of the fund groups have hired experienced teams to be able to tap in to new opportunities whilst the index tracker fund groups have largely concentrated on the key markets, although ETFs now offer a solution for almost any index. Benefits of active funds Active funds can underperform their indexes but talented managers who are able to meet and beat their objectives do exist. Many of the largest retail funds in the various IMA sectors have outperformed their indices.
Hence the weighted percentage of assets under management (AUM) in superior performing funds will be greater than the percentage of funds that have outperformed. Advisers recommending active funds will say that good active managers have the skill and flexibility to avoid fads or sectors/countries that are unattractive whilst being able to take advantage of opportunities that they can identify, or sell holdings when they feel value has been achieved or maybe is unlikely to be achieved. Active managers will contend that pricing anomalies do exist and a simple example is a company entering the FTSE100 which will inflate the share price automatically. Recent times have caused shares in many countries to be sold on fear with no assessment made of company balance sheets which many companies have strengthened after the financial crisis of 2008. Volatility in stock markets will always exist and whilst this can provide a bumpy ride for investors it will also provide opportunities to buy companies at very attractive prices. Finally, many advisers with investment expertise and resource simply feel it is part of their role to add value to their client service proposition through selecting good active managers.
Whilst passive funds have gained traction in the UK retail funds market, a huge number of advisers still use actively managed funds either exclusively or in tandem with other investments. Performance in volatile markets over the longer term is difficult but has been achieved. Exclusively The bewildering array of investment solutions available to advisers means there are numerous ways of building a portfolio for a client. Ultimately if the portfolio delivers on its objectives and meets the client’s aspirations one could argue there is no right or wrong combination of investments products. Many firms believe they can meet their client’s aspirations exclusively using active funds and have been doing so for a number of years. The wide variety of fund types within most sectors provides advisers with ample choice and combinations of fund management styles and approaches. If combined sensibly these can not only provide index beating returns but more importantly meet client expectations. Investment returns may continue to be subdued across some asset classes for some time, so it seems perfectly logical that advisers should seek to find fund managers who are able to generate extra performance for clients in these difficult times.
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