At Flying Colours, we strive to take sensible decisions for our client portfolios and keep investing as simple as possible. A key pillar of this is to favour index trackers over actively-managed funds. What is an index fund?
Like any pooled investment vehicle, active funds eliminate the risk of individual stocks and the risk of market sectors. However, history has shown the extra fees you pay for trying to beat the market is difficult to overcome. Simply put, it is very hard to beat the market.
There are two key problems that active managers face: one is the higher annual management charge they levy; a significant hurdle to overcome. Today, you will typically pay 0.75% in management fees for an active UK equity fund, compared to around 0.08% for a passive tracker.
Also, active managers typically trade more than a passive fund manager, and this trading costs money.
Recent regulatory disclosures show that for some UK active managers, their trading is costing an additional 0.75% or more every year.
It is for these reasons that we feel it is simply good sense to favour passive over active.
Chairman, Flying Colours Investment Committee