20 March 2024
A recent report on US investment trends highlighted the growing investment in passive funds compared to their active counterparts. This type of trend will move with market sentiment, but at the moment, it is finely balanced.
The amount of assets invested in US passive funds has topped active funds for the first time. Data shows that at the end of 2023, $13.3 trillion was invested in US passive funds against $13.2 trillion in US active funds. For clarity, passive funds tend to be structured to mimic a particular index, while active funds are more reliant on the research and experience of the underlying fund managers.
As passive funds simply follow an index, using a variety of assets such as stocks and derivatives, this can be automated, and costs are kept to a minimum. The situation is very different with active funds because you are buying into the experience and skills of the underlying fund managers; thereby, charges tend to be significantly higher. Over a 12-month period, this may not make a huge impact on performance, but the difference in charges can have a significant impact in the longer term.
An S&P report shows that in the ten years to June 2023, 77% of actively managed sterling-denominated UK equity funds underperformed their benchmark index. The figure for sterling-denominated global equity funds was even higher, at 95%. Switching back to the US, another S&P report shows that 90% of actively managed equity funds underperformed their benchmark index over the last twenty years.
Interestingly, over the years, we have seen a significant increase in the number of stock market indices. While we have the broader Dow Jones Industrial Average and FTSE 100 indices, for example, there are also individual indices focused on sectors and specific trends, such as FinTech. All a passive fund manager needs to do is (continue to) mimic the make-up of these indices, assuming there is sufficient liquidity and diversification to attract investors.
Imagine the scenario where you could pick several passive funds for your portfolio based on different global indices, sectors and specific trends. Instant diversification and funds that follow the general trend, as opposed to experiencing the volatility created when investing in individual stocks.
No. While the long-term data suggest that actively managed funds are constantly underperforming, this is not always the case. History shows that fund managers tend to have a 3 to 4 year period during which they often beat their benchmark index before the performance starts to fade. Consequently, as a fund manager using (actively managed) collective investments, switching at the peak of the performance to another fund at the start of the cycle will be beneficial - but this is a challenge.
In reality, there is every chance that global market sentiment will make a difference as to whether investors choose passive or active funds. If they want to go with the market, being passive is the best way forward, while those slightly more adventurous will put their funds (or part of their funds) in the hands of experts with impressive track records. While passive investment funds can deliver impressive performance if the indices go the right way, let's not forget the skills of a seasoned, experienced and well-researched active investment fund manager.
Looking at statistics in isolation gives you a broad example of performance across markets and sectors, pitting passive against active funds. However, it's essential to appreciate the performance and structure of individual passive and active funds. Ultimately, many investors choose to mix these different types of investment funds in their portfolio, providing a backbone and the potential for long-term capital appreciation.
Back to News
+44 (0)20 7048 9400
Email Us
Client login
