|
Active fund managers aim specifically to manage a fund by achieving growth in excess of a benchmark index. They do this by stock picking or speculating on market movements and by actively trading securities within a fund.
The buying and selling of underlying securities is known as portfolio turnover. Active fund managers have high turnovers in order to try and generate excess returns. |
|
“The laws of arithmetic have been suspended for the convenience of those who pursue their careers as active managers.”
Prof William Sharpe, economist & Nobel Laureate | |
Passive fund managers aim to replicate or track the movement of a particular benchmark index. Therefore, they will only trade securities when required to, in order to match the index that they are tracking.
Passive fund managers have lower turnovers as they merely have to track the movements of their indices.
The average turnover of actively managed equity funds is in the region of 70% per annum and passive index funds is up to 20% per annum (*1). The effect of this is to add charges between 0.36% and 1.44% per annum.(*2)
Paul Myners who led HM Treasury's review of institutional investment in the UK, has been outspoken on this issue, estimating that the cost of actively trading UK equity portfolios is around £2.5 billion each year. He was quoted as saying:
 “There is no evidence that this huge payment – a tax on investors – yields a positive return.”
To quote from the FSA document ‘The Price of Retail Investing in the UK’ February 2004:
“High explicit charges, on the other hand, do have a strong and predictable negative impact upon net performance”.
*1‘Portfolio Turnover of UK Funds’ a Lipper Consulting Report, Dec 2010
*2 The Price of Retail Investing in the UK FSA Occasional Paper Series 6 by Kevin R James, Feb 2000
|
Risk Warnings
The value of your investment can go down as well as up and past performance is no guarantee as to future performance.
| | 
