You may have heard the terms ‘active vs passive investing’ or ‘active vs passive management’, but do you know what it means and more importantly which is best? The simple answer: it all depends on your own individual circumstances. Whether you are looking to save on a regular basis or make a lump sum investment, it is useful to understand the difference between active and passive investment strategies and how they can each support your financial objectives.

Active management involves an investment manager carrying out research and analysis, in order to understand which investments to buy and when. Often, their aim is to outperform a benchmark or a particular index. They make also be looking to deliver something specific: such as a targeted investment related to a particular country, or theme. Where aiming for outperformance (returns above the benchmark or index) this “excess return” is known as ‘alpha’. This process of active management takes quite a bit of time, resource and expertise as you can imagine; and this is a service that you may see as valuable. You may not wish to do the need to all this research and analysis yourself of course!

Passive management, on the other hand, aims to mimic an index or a benchmark. An index may be the FTSE 100, or perhaps the S&P 500 for example. Rather than being based on research or analysis, passive investing involves just buying stocks in line with the benchmark or index. As such, it is a simpler approach and therefore the fees are typically lower. One issue with this approach can be that regardless of whether there may be reasons not to do so: such as where the risks of such an approach change, a passive fund will only track its designated benchmark or index.

Actively managed investment funds are run by an investment managers. They are allowed to use their skills and expertise, within what the fund permits, and this allows them to take action on your behalf. Investing in active management allows ordinary investors to hire a professional to manage their money. This can be advantageous where the manager is able to deliver what the investor is looking to achieve from their investment. However, you should be aware that there is no guarantee that the fund will outperform its benchmark.

Currently we are seeing increased movements in the value of various stock markets, and indeed we have seen some steep falls in values of various stocks and whole indices. As such, it may be time to look again at active management. This is because, where the right active management approach is selected, it has the potential to help you navigate these falling markets, reducing the potential for losses or indeed potentially benefiting during such times.

In summary, many active investing strategies aim to deliver better performance than passive investing, over time. There are however no guarantees. You will usually pay more for an active fund than for a passive fund. It is therefore essential with active investing to choose the right investment manager and the right investment strategy. Finally, always be mindful of the impact of fees on your investments.

When choosing the right investment approach for you, it is important to consider your financial goals and objectives and to see how your investment will help you achieve those goals.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. Although endeavours have been made to provide accurate and timely information, we cannot guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough review of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions.


For more information and answers to any questions you may have, please contact us.

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