An actively managed fund is run by a fund manager who will pick investments with a view to beating a benchmark or indices, whilst a passively managed fund has no active picking of investments but aims to replicate the performance of a benchmark or indices.
Every year, academic studies compare the returns of actively managed funds to the returns of passive funds. These studies have shown that actively managed funds rarely have returns higher than their passive counterparts. In fact, when you look at large cap funds, 70–80% of the time higher returns are achieved by owning an index fund, rather than by owning an actively managed fund.
The chart below illustrates that over a rolling 3 year period, only approximately 5% of active funds consistently beat their benchmark.
At Millen Capital we don’t believe one should choose between these two investment paths, but should look to blend passive investing with active fund management in order to increase the diversification of a portfolio and improve the chances of good, risk adjusted returns over the long term.
The combination of passive investing and active fund management within a balanced portfolio has been adopted by many leading wealth management businesses, with the use of a core - satellite structure as illustrated below.
The pursuit of above average returns is restricted to the satellite investments and investment managers, whereas the benchmark / index returns are left at the core of the portfolio.
