What are actively managed funds?
The goal is to “beat the market” - i.e. achieve a higher return than the average market performance. These funds often charge higher fees as they require more work to maintain, usually anywhere between 0.6% to 1.5%. The main benefit is that you don’t need to worry about making changes to your investment portfolio - instead, you have an expert doing all of that through a single fund!
By contrast, passively managed funds are those which track a specific index (such as the FTSE 100 and S&P 500). There, no one is hired to manage and monitor the fund and therefore has low administration costs. But more on that another time…for now, let’s focus on actively managed funds.
KEY TAKEAWAYS
- An actively managed has a fund manager or team who are hired to oversee the buying and selling of securities
- The goal is to "bear the market" rather than "mimic the market"
- There are higher fees incurred, regardless of how well your fund is performing
- The main advantage lies in its potential to outperform the market and make significant returns - although most funds fail to achieve this
What are the advantages of actively managed funds?
- Potential to outperform the market: Outperforming the market and making substantial returns is an attractive notion to investors. There are some funds which have managed to achieve this, so it’s worth researching the fund’s historical performance.
- No guesswork: Actively managed funds are considered a good option for early investors who want to remove all the guesswork associated with investing. Having an expert to apply their analytical research and forecasts can feel like an attractive prospect.
What are the disadvantages of actively managed funds?
- Higher fees: There are higher fees incurred, regardless of how well your fund is performing. If your fund underperforms by 2% one month, you’ll have lost 3.5% once you add on the 1.5% fee. Equally, if your fund is up 5% one month, you’ll only gain 3.5% once you factor in your fee.
- Underperform the market: Historically speaking, most actively managed funds don’t tend to outperform the market index. It’s therefore worth considering whether this type of investment is worth the cost.
- Impossible to predict a fund’s future performance: Reading historical data will not be a good indicator of how a fund will perform, making it almost impossible to predict!
What are examples of actively managed funds?
- ARK Innovation ETF (ARKK)
- First Trust Long/Short Equity ETF (FTLS)
- WisdomTree Emerging Markets Local Debt Fund (ELD)
- Pimco Enhanced Short Maturity Active ETF (MINT)
- FormulaFolios Tactical Income ETF (FFTI)
- SPDR DoubleLine Total Return Tactical ETF (TOTL)