Facts about funds
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Investment management strategies
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Funds are primarily differentiated by their objectives, but the investment strategy adopted is also significant. There are two distinct approaches - passive and active. The strategy in a passive fund is to track a particular index, but in an actively managed fund, the strategies vary considerably. |
Passive management
The fund is invested so that its value 'tracks' the value of a particular index as closely as possible. Hence, the funds are often referred to as index or tracker funds.
Passive management is a process which can be computerised and, by definition, asset allocation skills or stock selection expertise are not required. This explains why management costs are generally lower than for active management.
There are different forms of passive management. A fund tracking the FTSE 100, for example, will typically own all 100 companies in the same proportion as in the index. When its constituent holdings change, so do the holdings of the fund. Other funds hold a representative sample of an index. Alternatively, managers may use derivatives to simulate the index, which involves counterparty risk.
Passive management appeals to investors who do not want to risk picking an actively managed fund that may perform, on occasion, below the index. Of course, you can still lose money by investing in an index fund if the value of the index goes down.
Find out more about derivatives
Active management
This is an approach that aims to out-perform the market through independent judgment and analysis. The investment manager decides where your money is invested so as to meet the fund’s objectives. Each investment decision takes the likely risks and returns into account. It is based on research into companies, and the sectors and economies in which they operate, followed by an assessment of the value of specific shares and/or bonds.
The skill is to identify and take advantage of situations where the market price does not reflect the expected future returns to shareholders or bond holders, and to do so without taking undue risks. Active managers may also use derivatives to achieve the fund's objectives.
Many investment management firms adopt a team approach, where individual investment managers work together and are supported by analysts who specialise in particular sectors or regions.
UK-based investment management companies often employ investment professionals and research analysts around the world so they can have the best possible access to information.