Passive investment is the classic Buy & Hold approach using some form of tracker fund to mimic the performance of an index. Thus, tracker funds rise and fall with the index, all the way. Passive proponents reject market timing on the grounds that it can rarely be successful, even with Mystic Meg’s help. Passive is somehow regarded as lower risk although most tracker funds track equities and when equities fall, trackers fall.
Passive Funds
The number of passive funds changes frequently because new Exchange Traded Funds (ETFs) are launched almost every day and almost as frequently funds which have not attracted the support their sponsors wanted are culled. FE Trustnet reports on the performance of 209 passive funds out of a cohort of more than 3,000 funds. A passive fund can be found that tracks almost any index anywhere in the world. For investors it is best to choose from the passive funds monitored by FE Trustnet. The key factor in analysing a tracker fund is tracking error not fees. A figure of ± 0.5% is good.
Active or Passive?
Passive funds aim to replicate the movements of an index such as the FTSE All-Share as closely as possible while active funds aim to beat the index by a mixture of qualitative and quantitative research, analysis and human judgement. It is argued that passive funds give better returns than 80% of active funds. That may be so but one would expect to select active funds from the 1,000 plus that represent the 20%.
Timing
Short-term timing in the manner of market traders is not appropriate for passive or active investors but whereas an active investment style expects to benefit from timing overall market movements, the passive style rejects timing altogether.
An investor who bought a FTSE tracker on 30th December 1999 (FTSE 100 6,930) would have been a disappointed individual until April 2015 (FTSE 100 7,104) when there would be a small profit. Unfortunately, that investor looks like nursing a loss for much longer.
Over the 15 years the average fund in the UK All companies sector doubled in value.
In contrast, an investor who bought a tracker on 20th March 2003 (FTSE 100 3,765) would today, 1st September, (FTSE 100 6,058) still be a happy soul with an increase of 60% in the index and, thus, in the tracker fund.
So What?
Passive funds are seen to remove the need to manage investments and so reduce the time pressure on advisers who are generalists and not specialist investment managers.
However, never say timing does not count. If you buy a tracker fund close to the peak of the market be prepared to be disappointed for a long time. Timing makes a difference.
Disclaimer: This material is published by Raymond James Investment Services Limited (RJIS) for information purposes only and should not be regarded as providing any specific advice. Opinions constitute our judgement of this date and are subject to change without warning.