Investment funds, including our PensionBee plans, take one of two different approaches to investing. These contrasting philosophies are known in the industry as either ‘active’ or ‘passive’ strategies, and each approach can have a different impact on your pension.
As such, it’s important to understand how each of them work. Let’s start by defining active and passive investing.
Active investing takes a hands-on approach to money management. It involves the frequent buying and selling of assets like stocks and bonds, with the overall aim being to match a benchmark or beat the performance of a particular market.
Passive investing takes a more hands-off approach to money management. It minimises buying and selling, and instead aims to track market performance.
So, which approach is better?
As you can tell, these are two very distinct philosophies, and there’s intense debate over which one works the most effectively.
This is malpractice. Many asset classes are not suited for index investing. Indexers take the dynamic in large cap US equites and apply it to all asset classes. That does not work in HY@for example where you would have to be a complete moron to go passive.— Mortimer Duke (@theoneonthree) June 4, 2019
We can’t tell you which is the best approach – unfortunately there’s no one-size-fits-all answer – but what we can do is run through the pro and cons and paint a clearer picture of both.
Firstly, let’s take a look at active investing.
The pros of active investing
A key benefit of active investing is that if offers lots of flexibility. An active fund manager can switch index or sector fairly rapidly, meaning they’re better placed to exploit profitable opportunities.
The cons of active investing
✖️ High fees
As it’s hands-on, active investment tends be more expensive. According to Which? the typical ongoing charge for an actively managed fund is 0.85%, rising to 1% in many cases.
✖️ Minimum thresholds
The most successful investment companies can be selective about their clients. Many will only accept savers with £100,000 or more to invest.
So, how does passive investing compare?
The pros of passive investing
✔️ Lower fees
As it’s less hands-on, passive investing tends to work out much cheaper. Take our passive Tracker plan for instance, which costs just 0.50% per year.
With a passive investment fund you’re clear on where your money is and how it’s performing. It’s also relatively simple to move your money and reinvest it elsewhere.
The cons of passive investing
✖️ Mirrors market performance
As passive investments track the market they will only mirror its performance, for better or worse.
To recap then, an active investment fund has more freedom to exploit market opportunities. However, it’s important to remember that active funds will only perform as well as the minds behind the fund – and as a recent news has shown even the biggest funds aren’t infallible.
Woodford suspension a symbolic blow for active management: Cheerleaders such as HL helped fund become one of the UK's most popular https://t.co/bKuHWH1Fxz #Equities #Investment #News #ProductNews pic.twitter.com/DibuEegCjh— Portfolio Adviser (@PortfAdviser) June 3, 2019
On top of this they’re often a more expensive option, open only to the investors with the biggest pockets. After all, someone has to pay for all the analysts and trading fees associated with active management.
In contrast, the ‘buy and hold’ approach followed by passive funds tends to work out much cheaper, and there’s evidence that this approach tends to work well over time.
For that reason all of the PensionBee plans generally take a passive approach. You can find out more about how plans work on our dedicated plans page.