Offering both Passive and Active Investments

Tuesday 2 April, 2024

At Lonsdale Wealth Management our independent financial advisers spend time considering your portfolio construction. We review both active and passive investment styles through our financial planning.  

Our philosophy is we believe customers should consider the possibility of combining both approaches, so they can benefit from the advantages that both passive and active management can offer.

There are compelling arguments on both sides of the active versus passive investment debate when it comes to portfolio construction. A benefit for one can be a drawback for another, which is why we believe there isn't a right or wrong choice and combining both in a portfolio is often the right choice for our customers.

Why invest in passive funds?

Passive funds have increased in popularity in recent years due to their relatively strong performance and numerous benefits.

Advantages of passive funds?

  • They have lower management costs so offer a more affordable way to access investment markets.
  • The post global financial crisis period has enabled passive indices to outperform their active counterparts. US or global large cap equities are a good example of markets where it is difficult to find active managers who consistently outperform the benchmark over a long period of time. 
  • Customers now have more choice as the number of available passive instruments has increased (for example, in geography, sector, duration).
  • Passives have a broad market exposure. As these funds replicate an index of assets, they can provide exposure to a whole market.  

Disadvantages of passive funds

  • Some passive funds are unable to outperform "the market" in rising and, particularly, in falling markets. 
  • When markets are volatile, the tracking error of passive indices tends to increase, making their performance less predictable.
  • Passive indices may have a high concentration risk in a limited number of securities.

Why invest in active funds?

While passive managers seek to own all the securities in a given index, active managers select specific investments so active managers try to beat the performance of the market not match it. 

The main drawback of active management compared to investing in passive funds is it’s more expensive, yet it has often delivered less performance. 

So, when and why is active management useful?

Advantages of Active funds

Active management has outperformed passive management during some periods of volatility when we experience more dispersion between stock performance. For examples at the height of the COVID-19 pandemic and following the recent market correction.

Another reason active management is attractive is that, unlike passive investing, it recognises the innate inefficiency and irrationality of markets and their participants. This might be important if you want to invest in more specialised asset classes such as small and mid-cap equities, corporate bonds or emerging markets. 

Recommending a blended approach of active and passive investments

Conor Muldoon, Independent financial adviser St Albans, Hertfordshire said:

‘As both passive and active funds have their own advantages and disadvantages, we normally recommend most customers have a blended approach and invest in a mix of both. It’s important to remember that we need to offer creative and flexible portfolio construction and offer different strategies for our customers.  Investment returns for passive funds are similar to market performance and volatility akin to the benchmark, which helps achieve an overall more consistent return for our customers when combined with active managers who can sometimes produce more inconsistent results by trying to beat the market across certain time periods.’

Conor Muldoon, Independent financial adviser St Albans, Hertfordshire continued:

 ‘If you are new to investing, we recommend you read our Beginner’s Guide to Investing which explains in more detail the differences in active and passive investment. If you are looking for local financial advice call our offices in WimbledonBarnetLeeds / BradfordStaffordWareChippenhamRingwoodHarpendenSt Albans.’

In Summary…

At Lonsdale Wealth Management our financial advisers offer both active and passive investment styles for your financial planning.  

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and customers may not get back the full amount invested. Views and opinions are based on current market conditions and are subject to change. This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. 

Past performance is not a reliable indicator of future performance. The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

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