Active and Passive Investment Management
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The second biggest decision you will make about a given fund is whether it is
actively or passively managed. The difference between Active and Passive investment management is in how the
decision to buy or sell investments is made.
An actively managed fund is run by a real life investment manager. In an
actively managed fund it is a human
being who makes all the investment decisions, i.e. whether or not to purchase shares in Marks and Spencer
or whether to instead invest in ICI. An active investment manager will use their
own skill, knowledge and experience to make investment decisions. If you have an
actively managed fund then somebody needs to pay the investment manager to
manage the fund, do the research etc. Therefore the costs of having somebody
manage the fund will be passed on to you in some way or another.
A passively managed fund is essentially run by a computer. The computer is
programmed to try and simulate the returns achieved on a particular index.
An index is essentially just a weighted average price for a set of shares. The
FTSE 100 "Footsie" is one such index representing the 100 largest companies in
the UK. Therefore a passively managed fund will consist of all the constituents
of the index in the proportions held in the index. If a new constituent comes
into the index a passive fund will buy it. If a constituent leaves the index the
passively managed fund will sell it. These decisions can all be made by the
computer with the knowledge of how the index is constructed. As the whole system
is run by a computer and not by a human the costs of running a passively managed
fund are lower. The result is that charges are much lower for many passively
managed funds.
A passively managed fund is always trying to achieve the same return as the
index. For this reason passively managed funds are sometimes called
index tracking funds.
If you are in any doubt about which is the best option for you seek
independent financial
advice.
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