Different shapes for different types of investor

Mr Yearsley says: “Cost conscious investors clearly should consider passive. Those who want specific investment themes or exposures will naturally gravitate towards active funds where there is more choice.

“Passive funds are a “commodity” product and therefore price is a key determinant. The other major factor is correlation to the index. What is the norm, under or over performance? How accurately does it track?

“Active funds are much more subjective. What is the manager’s process? What resources does he have? What is his commitment? What is his track record? All these questions and many more could and should be asked.”

Robin Stoakley, managing director for UK intermediary at Schroders, says an investor should choose a passive fund if he or she is uncomfortable investing in a fund whose performance could be significantly different to the market’s and simply requires a return broadly in line with the market average, less fees.

This approach is particularly useful for investors that are using a simpler asset allocation approach, as passive will provide low-cost exposure to the relevant areas of the market to fulfill each portfolio element.

Mr Stoakley says an active investor should have undertaken significant research and have a degree of conviction that his or her chosen manager will outperform the reference benchmark. An active investor should be prepared to tolerate a degree of variation in performance compared to the market average, he adds.

Many investors choose to combine active and passive funds in portfolios to maximise potential returns while minimising volatility, Mr Stoakley continues.

Often, he says passive funds are used to give exposure to markets whose high levels of efficiency make outperforming more difficult than others (for example, the US) and use their active budgets where they have a greater degree of conviction that such a strategy will outperform (in say the Smaller Companies sector, for example).

Alan Miller, co-founder and chief investment officer of SCM Private, is more outspoken, terming those that invest in active funds as ‘gamblers’.

If you want to make substantial gains but are prepared to make substantial losses and trust your judgement that you or your adviser can pick the right manager, then Mr Miller says active funds are for you.

If on the other hand you are more cautious or maybe more logical and simply want to maximise the statistical odds in your favour of winning, Mr Miller says passive funds are for you.

He says there are probably two sensible strategies advisers and their clients should take to holding active and passive funds.

The first option is for advisers to make sure their clients have a passive ‘core’ at the centre of their overall portfolio, with ‘satellite’ active funds they believe will do what they say on the tin.

The other option, he says, is to simply have a 100 per cent selection of passive funds which the client might want to keep exactly the same or actively trade, with an adviser helping to pick out opportunities in markets rather than individual securities.