Investors should assess the reputation, resource, longevity and track record of any active or passive manager before investing.
While this type of analysis is no guarantee that the chosen fund will perform as stated, Robin Stoakley, managing director for UK intermediary at Schroders, says it is, in his opinion, a useful guide.
Advisers should demonstrate why they selected an active or passive fund, through a detailed fact find to assess a client’s tolerance for volatility of performance relative to that of the market.
He says: “Clearly those with no or a low tolerance would be better off investing through passive strategies and vice versa.”
In terms of researching active funds, Alan Miller, co-founder and chief investment officer of SCM Private, recommended avoiding any large fund as these normally have substantial ‘dis-economies of scale’, tend to be more focused on doing what everyone else is doing, and often spend more time “looking in the mirror”.
He says often the best active funds will be in groups you have never heard of, by managers you never heard of.
In terms of passive funds, Mr Miller says it partly depends on the pedigree of the fund management company in relation to index funds.
He says: “Many of the non-index specialists have a very poor history of succeeding in closely tracking the index, and normally much more importantly, the actual choice of index.
“For example this year you would have been much better off buying the most expensive FTSE 250 tracker than the least expensive FTSE 100 tracker as the mid-caps (FTSE 250) have massively outperformed the large caps (FTSE 100).”