Morningstar's Guide to Active and Passive Investing

Investors can choose between 3,000 open-end funds, 300 investment trusts and more than 2,000 exchange-traded funds; but with choices come challenges

Emma Wall 15 June, 2015 | 8:46AM
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What’s in your portfolio? In generations past if you wanted to boost your income, investors turned to stocks – holding individual share certificates from the likes of Barclays, Unilever and Tesco.

Sixty years ago the FTSE 100 did not yet exist; instead the main UK index was the FT 30, and diversification was achieved by investing in different sectors. There were a few investment trusts on offer, but they were mainly focused on domestic equities. A private investor would not have dreamt of accessing a pharmaceutical company in India or a technology stock listed in Japan.

Now, investors can choose between 3,000 open-end funds, 300 investment trusts and more than 2,000 exchange traded funds. Offering you access to the most remote stock markets, commodities and bonds from as little as £50 a month.

But with choice comes challenges. How do you determine where to invest – and which vehicle to use? Do you leave asset allocation to the professionals or are your gains achieved by your own hand? When is it worth paying extra for a skilled fund manager, if ever?

On the Alliance Trust Savings investment platform last year seven out of the top 10 selling funds were passive, just one year earlier in 2013 the most popular funds on the platform were actively managed.

Pension funds are taking up passives too – thanks to a recent ruling which says defined contribution pension schemes cannot charge more than 0.75% a year. But price should not be the only consideration when choosing portfolio holdings. Here at Morningstar the cost of investing is only one of five measures analysts assess before awarding a rating.

Passives have other attributes other than just being cheap – as active management is not solely defined by its expense. All this week we are running a Guide to Active and Passive Investing to help you, the investor, make smart choices for your portfolio.

Monday: Does Price Matter?

Cost should not be the only consideration when choosing an investment

Is Price Important When Choosing Investments?

Are You Paying Too Much to Invest?

The Case for Flat Fund Fees

How to Reduce the Cost of Investing

Tuesday: When it Pays to Go Active

These fund managers earn their fee

Why Pay for Active Management?

6 Questions to Ask Your Active Fund Before Investing

Which are the Cheapest Investment Trusts?

Where are the Investment Opportunities in Frontier Markets?

When Should You Opt for Active Funds?

What is a Fund's Active Share?

Wednesday: Passive Funds to Consider

When you should consider passive investment

What Are the Benefits of Passive Investing

Cheapest Passive Funds for Your Investment Portfolio

5 Questions Worth Asking Your Passive Fund

Top 5 ETFs on Morningstar

Why Passive Funds have Grown in Popularity

Thursday: Blending Active and Passive in a Portfolio

How the two approaches are complimentary

Active and Passive Funds to Invest in UK Equities

Active vs Passive: What is Best for the Investor?

Active, Passive or Both: 7 Questiosn to Help You Decide

Thousands of Investors Denied Access to ETFs

How Active and Passive Strategies Can Work Together

Friday: Retirement and Pensions

How to use active and passive funds in your retirement plan

Active and Passive Strategies Within a Retirement Portfolio

Be Choosey When Picking Active or Passive Funds

Workplace Pensions Blend Active and Passive Funds to Boost Savings

How to Invest Post-Retirement

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Emma Wall  is former Senior International Editor for Morningstar

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