be considered alongside
up-front costs.
For several reasons,
starting with the possibility
of continuing low interest
rate levels, many investors
want to receive a dividend,
but this can be difficult to
achieve with ETFs, which
generally reinvest their dividends.
But iShares ETFs
generally pay out a dividend
making them an
attractive alternative,
although care must be
taken not to purchase too
many iShares ETFs to prevent
over-concentration in
one issuer.
Another way of reducing
costs is by selling funds
tracking the FTSE All Share
Index and buying a wide
range of the actual shares
– such as BP, Glaxo and
HSBC – in the same proportions
as the index, thus
doing away with even the
minimal cost of passive
funds.
l Depth and liquidity
A passive investment works
best where there is a deep,
liquid and transparent
market behind it. They
track indices based upon
these deep markets such as
the equity market, the gilt
market or the commodities
market. Passive investments
are not good at
tracking investments which
are not deep or liquid such
as property or hedge
funds.
The property market is
INDEX INVESTING ACTIVE AND PASSIVE IN A SINGLE PORTFOLIO
a large market, but it is
also illiquid with properties
often taking months or
years to sell. Each property
is also very different from
the next making tracking
very difficult.
Similarly hedge funds
are generally very illiquid
because of the long-term
nature of their investments
and because most hedge
funds are private partnerships
and cannot be bought
and sold by the trackers.
The main advantages of
the passive portfolio are its
low cost and greater likelihood
of better performance
over time.
As we have already
described, most active
equity managers underperform
over time due to their
fees and their costs of dealing.
A portfolio of passive
investments will minimise
fees and costs of dealing,
giving the investor better
returns over time.
Some investors, however,
prefer to have active
managers in the belief that
they will outperform over
time. Active managers may
also be able to access some
investment classes where
passive funds have difficulty.
For instance, all
investments in direct property
(such as buildings) are
actively managed. Finally,
active managers have a
greater degree of flexibility
allowing the funds to hold
extra cash in a downturn
thereby protecting their
shareholders.
come and book your next luxury holiday with
the experts at 84 bishopsgate, ec2n 4au or call us on 0207 374 6601
The
SUMMARY
Much has been made about
the use of either active or
passive funds, but little has
been made to discuss how the
two can be blended together
While finding active funds
that will outperform an index
is difficult to do, passive
funds by definition will never
outperform the index.
But combining the two gives
investors the potential for the
best of both worlds, matching
liquidity needs, transparency
and potential for higher
returns to the most relevant
investment.
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