Passive Investment Management
What is passive management?
Passive investment management, or passive investing, is about earning the market rate of return. That is, to mirror the movements of an index, e.g. FTSE 100, so that the fund achieves the same growth over the long term as the index itself.
It involves making as few investing decisions as possible and automating the decision to buy or sell investments. This is to drive down the cost of running the fund and therefore the cost to the investor of investing in and holding the fund.
The most popular type of passive fund is the index tracker, or index tracking fund. The idea of these funds is that you buy into a whole sector, or sometimes referred to as an index or asset class, such as the FTSE All Share, rather than just some of the individual shares within that sector, on the basis that you will capture the market rate of return.
If you only choose to buy certain shares within the sector you will have to make a judgement call on what to buy and when to buy them, and then wait to see whether the combination of shares you chose perform better or worse than the sector itself – this is known as active investment management.
Advantages of passive investing...
When people invest in equity markets over the long term what they are really looking to do is capture the growth of the markets. They want their money to work for them and earn the growth that has historically been achieved. Passive investment management will do this.
Index tracking funds are an effective, cost-efficient way of investing in the markets over the long term without the hassle of worrying whether you’ve chosen the right fund.
There is also much evidence to suggest that actively managed funds do not outperform their benchmark index (i.e. they do not do their job) over a long period of time. Therefore the charges related to these funds cannot be justified and the majority of investors would be better off investing in passive funds.
Exchange traded funds (ETFs) are also an extremely popular way of investing in passive investment funds. These are structured in a different way to normal unit trusts. They are funds that are quoted on the stock exchange and so are easier to buy and sell as they are priced and traded throughout the day.
ETFs also offer a wider variety of sectors than the normal choice of unit trust index trackers would offer. An investor looking to put money in to more exotic sectors e.g. commodities, could do so passively using ETFs.
How to invest in passive funds...
Investor Profile provides a range of passive investment funds made available through the Instant Funds Portfolio.
For a comprehensive choice of all passive investment funds including index trackers and exchange traded funds (ETFs) our Free Range Portfolio offers you the best choice on the market.
NOTE: the Free Range Portfolio also now offers the Vanguard range of passive funds, which is only normally available via professional wealth managers in the UK.
