When selecting funds to add to an investment portfolio, many are attracted by actively managed investment funds, rather than passive funds, that aim to track an index. One of the most obvious reasons is that a passive investment, which replicates some or all of the components of an index, is unlikely to ever outperform the benchmark index.
Passive investments do, however, carry some advantages over actively managed funds. Passive funds provide broad exposure to an index, and generally carry low fees. That is why we hold an allocation to passive investments within our own discretionary managed portfolios, to provide an element of broad market exposure.
Our investment approach also looks to add actively managed funds, where a manager or management team select positions within their universe of stocks or bonds. The aim of active management is, of course, to select the best performing positions within the portfolio, and avoid the weaker performers, thus outperforming the representative benchmark. Active management does, however, come with a cost in terms of higher management fees, and it is therefore important that investors get good value for money.
Selecting active funds to hold in a portfolio can be a daunting process, due to the sheer number of funds available to UK investors, and this process isn’t made any easier as some active funds hold a very diversified range of positions. These “pseudo-trackers” potentially only produce returns that deviate from the index return by a small margin. This over-diversification may well lead to portfolio returns that closely follow the benchmark, which may prompt the investor to question what benefit the active manager can provide over a passive portfolio approach. This is particularly important when considering an Equities passive fund can carry an annual management charge of 0.10% per annum, compared to actively managed funds, where annual management charges of between 0.75% and 1% per annum are typical.
At the opposite end of the investment spectrum are what we describe as “high conviction” funds. These are funds with a very different investment approach and tend to hold a concentrated portfolio of investments within the fund. This can be as little as 20 stocks, but typically falls in the range of 30-60 stocks, which may well be highly concentrated when considering the universe in which the fund operates.
By constructing a concentrated portfolio, the manager will look to hold larger positions in stocks that aim to outperform, which in turn can improve the fund performance compared to the benchmark. High conviction funds tend to focus very heavily on stock selection, and as a result, portfolio turnover may well be lower than average. Furthermore, managers may well look to stick with positions through a market cycle, which can mean that funds can weather uncertain market conditions.
Selecting high conviction funds places greater emphasis on careful fund selection, as the decisions taken by the manager, or management team, have a much larger influence on returns. This is where expert fund analysis, focusing on the strategy adopted by the managers and careful review of the manager’s track record, can help identify high conviction funds with the best chance of outperforming benchmark returns.
When constructing our portfolios, the MGFP Investment Committee meets regularly with leading fund houses and question the active managers directly to gain a better understanding of the investment approach adopted. Combined with advanced quantitative fund selection tools, our experienced team can filter the large number of funds available to UK investors, with the aim of selecting a number of high conviction funds to blend with broad passive market exposure. We feel that taking this disciplined approach to fund selection and portfolio construction can lead to strong and consistent returns over time.
If you would like to hear more about our investment strategy, please speak to one of our Financial Planners here.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.
