For years investors have fiercely debated whether active or passive funds are better. I’m not sure why these discussions need to be reduced to an either/or situation – each has its own strengths and the two can clearly complement each other. But how to decide which to use for what parts of your portfolio?
Active and Passive Can Work Together
The Morningstar Active/Passive Barometer report released this week seems finally to have answered that question. For those who haven’t seen it yet, it shows the performance of active funds focused on various areas and the percentage of those which have managed to outshine their passive counterparts.
And while it was no great surprise to see that US active funds struggled to beat the market, it was shocking to see that just 1.5% of these funds have managed to outperform the typical passive option over the past 10 years. You have to wonder, in light of such stark figures, why fund groups even persist in running these funds. It can’t be good the managers’ morale.
Elsewhere, I was impressed to see more than three-quarters of active managers focusing on UK mid-cap stocks had beaten their passive counterparts over the past decade. It really shows that some markets are ripe for talented stock pickers.
Active funds can come in for a lot of flak, and with ETFs offering simple and low-cost alternatives sometimes the criticism is justified. But reports such as this serve as a good reminder that when you pick a truly skilled manager and set her to work in the right market, you can reap rewards. You’ve just got to be choosy.
Feeling Spooked?
Merian’s Chrysalis investment trust is raising more money less than a year after it launched, and before it has even put to the work the capital that it raised from investors in November 2018. It suggests that there is strong demand for the trust, which focuses on fast-growing, unquoted stocks nearing IPO stage. Certainly, its shares are at a hefty 13.6% premium, according to Morningstar.
Some of the £100 million it plans to raise will be used to increase the trust’s stakes in companies it already owns. But, interestingly, it will be acquiring some of these stakes from Merian’s open-ended Smaller Companies fund, which currently has 5.8% of its assets in unquoted companies.
Merian has always been very open about this and that proportion of assets is well within the guidelines, but it suggests that the recent spotlight on liquidity, sparked by the closure of the Woodford Equity Income fund may have spooked, if not Merian, then some of its investors.
Outdated Investing
“Investors are a superstitious bunch, aren’t they,” was one comment made in the office this week about this article. And yes, I suppose they are.
We live in an incredible age, where you buy things by tapping a piece of plastic, carry around a library of books and music in a tiny phone in your pocket, have pretty much anything delivered to you within an hour. And yet, despite all those amazing advances, there are still some people out there who think that a legitimate way to make an investment decision is by relying on a phrase simply because it rhymes.
Sell in May and go away, don’t come back until St Ledger’s Day.
For some reason, we discuss every year whether this old adage about avoiding the stock market over the summer, reaps rewards. Turns out that like many other things in life, half the time it works, half the time it doesn’t.
But honestly, if you’re still abiding by this antiquated rule, tear it up and come up with something new in time for next summer. Please. Because you might as well just flip a coin, put it all on black, or close your eyes and pick the first fund you point at.
Or...you could just invest regular amounts in a diversified portfolio for the long-term, ignoring short-term dips and market noise. I know it doesn’t rhyme, but I’m pretty sure it works.
