Let's take North America as an example, I compared the S&P 500, (the top performing US index over the past 5 years) against its respective actively managed sector performance. The S&P500 has returned 13.35%, whereas the IMA (Investment Management Association) North America Sector returned 53.5%. It is evident here that the actively managed funds have outperformed. This is down to a number of reasons.
Firstly fund managers have the ability to pick the best equities out of the index leaving those which will under perform. Secondly, and possibly the most important is that they are able to manage risk across the portfolio. Selecting not only the best funds, but the best sectors, one is able to diversify risk across the fund. Further analysis into the correlation of each equity held you can combine the weightings together to ensure optimum protection on the downside whilst being able to capture growth through stock selection.
The most common way of purchasing an index is through an Exchange Traded Fund (ETF), these are cheap ways of accessing a basket of companies. There are usually two types of ETF, those that invest the money in the physical asset, in this case the constituents of the index, or those that swap performance of a basket of assets for that of the index. The later is considered to be less desirable as many investors do not like holding something that isn't the asset they have paid for. Never the less, these offer the closest replication of performance as there is very little tracking error (the difference between the actual index performance and the fund). With the synthetic ETFs most offer a collateralised swap, worst case if the swap counter-party fails, you are usually guaranteed to receive AA rated bonds.
For long term investing over 20+ years many see it beneficial to hold just the index, it is a cheap and effective way to gain exposure to a country or market, it requires less research and in some cases will out perform managed funds.
However, for the best returns I would recommend actively managed funds, these will offer the best downside protection which would have been important over the past five years and if you select correctly the best returns. Taking the earlier example of the US equity market, the S&P 500, recently hitting new highs has returned around 1303% since 1985. Compare this to our North American equity fund in Top 10 Funds of the Month, Gorden Grender who runs GAM North American Growth has returned 2700%. So which one would you rather have?
The most common way of purchasing an index is through an Exchange Traded Fund (ETF), these are cheap ways of accessing a basket of companies. There are usually two types of ETF, those that invest the money in the physical asset, in this case the constituents of the index, or those that swap performance of a basket of assets for that of the index. The later is considered to be less desirable as many investors do not like holding something that isn't the asset they have paid for. Never the less, these offer the closest replication of performance as there is very little tracking error (the difference between the actual index performance and the fund). With the synthetic ETFs most offer a collateralised swap, worst case if the swap counter-party fails, you are usually guaranteed to receive AA rated bonds.
For long term investing over 20+ years many see it beneficial to hold just the index, it is a cheap and effective way to gain exposure to a country or market, it requires less research and in some cases will out perform managed funds.
However, for the best returns I would recommend actively managed funds, these will offer the best downside protection which would have been important over the past five years and if you select correctly the best returns. Taking the earlier example of the US equity market, the S&P 500, recently hitting new highs has returned around 1303% since 1985. Compare this to our North American equity fund in Top 10 Funds of the Month, Gorden Grender who runs GAM North American Growth has returned 2700%. So which one would you rather have?
Actively managed funds need to be reviewed as there will undoubtedly be funds that under perform the index, so pick wisely.
For those of you who are not convinced by this argument a number of providers offer cheap access to equities and other asset classes via both ETFs and a handful of unit trusts. Namely Vanguard, BlackRock's Ishares and Deutsche Bank's db X-Trackers
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