What’s the difference between active and passive investing? The words “active”
and “passive” are used often in investing, but are you sure you understand them?
A
ll too often,
Kiwis focus
solely on
the fees they
pay for an investment,
says Ainsley McLaren,
Executive Director
at Harbour Asset
Management. It’s
important to think
about the investments
that make up your
funds, and whether they
will do what you need
them to do through
good and bad times.
PASSIVE OR ACTIVE:
WHAT’S THE DIFFERENCE?
Put simply, passive investing
minimises buying and selling
of investments, which reduces
running costs. As a result
passive funds tend to have lower
fees.
A typical passive fund often
mirrors all of the investments
in a certain index such as the
NZX50 or FTSE100. These are
called “index” funds and hold
all, or a representative subset, of
the companies in that index.
Active is where professional
fund managers select
investments that may earn
better returns than the index
over time. The managers can
be nimble and flexible and
choose investments better able
to ride the ups and downs in
volatile times. Active funds tend
to have a wider variety of fees,
depending on what they invest
in.
“The active versus passive
investment debate has been
around nearly since Adam,”
says McLaren. “In the US,
around 20% of money invested
is passively managed and 80%
is actively managed. Many
investors blend both styles.”One of the reasons that
passive investing has been
popular in recent years may be
that markets have on the whole
boomed since the GFC. Index
and other passive funds have
tracked up with them.
If markets start to head
downwards, that’s when Kiwis
with active investments mayreally see the value in their
choice. Their active fund
managers should have alreadyidentified investments with
good outlooks even in troubled
times.FEES ARE SECONDARY
McLaren says the issue of
fees is not the number one
consideration when choosing
the right fund for your personal
situation.SPONSORED CONTENT
Passive or active or both?
“First you need to know your risk
tolerance, which helps you choose
between conservative, balanced
or growth type investments.”Ainsley
McLaren“First you need to know your
risk tolerance, which helps you
choose between conservative,
balanced or growth type
investments. That choice will
drive around 85 – 90% of your
returns over time,” she says.
Fund managers such as
Harbour have a range of funds
on offer to meet most needs. If
you want a low fee index-tracking
fund for example, Harbour
has the New Zealand Equity
Advanced Beta Fund, 70% of
which is invested in an index and
30% invested more actively.
“At the other end of the range
we have more actively managed
funds, such as Harbour’s
Australasian Equity Focus Fund,
which holds a smaller number
of companies reflecting our best
ideas based on research,” says
McLaren.
Likewise, with bond
investments – the more active
end of the spectrum includes
funds such as Harbour’s NZ
Core Fixed Interest Fund and,
for a lower fee option, there’s the
Harbour NZ Corporate Bond
Fund.WHEN INVESTING ISN’T
YOUR DAY JOB
Not everyone’s nerves can
take downturns. Whether
active, passive or a mix, try to
choose your funds well and put
them in the bottom drawer,
says McLaren. Chopping
and changing because you’re
tracking your investments
minute by minute on your
smartphone can leave you worse
off.
Good fund managers
live and breathe portfolio
theory, behavioural finance,
performance measurements
and other tools of the trade. Let
them do the worrying for you.