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Understanding the
active and passive
investment styles
No detailed analysis
A
ims to replicate the performance of
a market
ACTIVE
Fund manager conducts rigorous research
Aims to beat the market
Maximise gains and minimise losses
When investing ones money, one of the choices facing investors is an active or passive investing style.
It is important for an investor to understand the main principles of each style before determining
which one or a combination of the two is most suitable for their particular investment objectives.
This fact sheet sets out to explain the differences between these two investment styles to aid investors
in their discussions with their financial adviser on choosing the most suited approach.
FUNDamentals DISCOVERY INVEST
Passive investing
Active investing
Conversely, passive or index-tracker managers typically charge lower management fees for a more simplified investment process
of matching the returns of an index. For the active style, the risk is more manager-driven while for passive investing, the risk is
more market-driven.
Given the nature of the investment styles, index-tracking investors are always fully invested to the index (or component of
the index), meaning the portfolio will hold a proportion of just about every stock in the index and little to no cash as an asset.
This subjects the portfolio to market swings, which proves rewarding during market upturns, but costly during protracted
market declines.
Active managers on the other hand, vary the type of stocks and amount of cash held in the portfolio based on their opinion
of market conditions and stock prices. These are typically rewarding during market upswings, and can be less costly during
market declines.
FUNDamentals DISCOVERY INVEST
Aims to beat the market or beat a stated Does not aim to beat the market or a benchmark.
Performance benchmark. Aims to replicate the performance of a market
Has the ability to maximise gains and positive or negative.
minimise losses. Cannot make gains greater than the market.
Fees Manager fees are higher due to increased Lower management and operating fees.
levels of skill, knowledge and involvement
required on behalf of the manager.
Risk Fund is exposed to manager risk as well as Fund is exposed to market risk.
market risk.
Many studies have been performed to test whether one particular investment style in terms
of active versus passive investing has proven more successful. Conclusive evidence has not
been determined to support either strategy in totality. However, it should be acknowledged
that both strategies have appealing characteristics and have seen varying degrees
of success based on certain economic conditions, market types, and time
periods. Moreover, the suitability of either investment approach, or
a combination of the two approaches, is based on ones personal
investment objectives and circumstances. Your financial adviser will
be able to recommend investment funds that are suitable for your
needs and that best fit your specific risk profile and investment
objectives.
GM_16246DI_27/06/2012