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 * About us
 * Invest with M&G
   Choosing your investment options
   Choosing your investment options
    * ISAs
    * Junior ISAs
    * OEICs
    * Regular savings plan
    * Get financial advice
    * Visit our hub page
   
   Choosing your fund options
   Choosing your fund options
    * M&G Planet+
    * Multi Asset
    * Equities
    * Fixed Income (Bonds)
    * Property
    * Fund charges
    * Fund charge calculator
    * Share classes
    * Annual Value Assessment
    * Get financial advice
    * Visit our hub page
   
   Managing your investments
   Managing your investments
    * Make an investment
    * Managing your investment with M&G
    * Manage online
    * Consider the risk
    * Online valuation
    * Transfer your ISA or Junior ISA to M&G
    * Switch between M&G products and funds
    * Withdrawing your M&G funds and products
    * Get financial advice
    * Visit our hub page

 * In the Spotlight
   M&G Insights
   M&G Insights
    * The opportunity to grow your money AND care for the planet
    * Investing in the circular economy
    * The Climate Emergency and the role investors can play
    * Why active investors can be responsible investors
    * Don’t fall prey to investment scams
    * Five reasons to open a stocks and shares ISA
    * Investing for impact: profit with purpose
    * Visit our hub page
   
   Spotlight on
   Spotlight on
    * Investing for children
    * Planet+
    * Visit our hub page

 * Literature
   Literature
   Literature
    * Application Forms
    * Visit our literature hub

 * Our Funds
 * Help
   Help & Support
   Help & Support
    * Visit our Help centre

 * Search Search Submit Close Search
 * Contact us
 * M&G online
 * Private investor
   Country
   Country
    * United Kingdom
    * Change country
   
   Change audience
   Change audience
    * Institutional
    * Professional Investor
    * Private Investor
    * Charities
    * Corporate Trust
    * Private Finance Solutions



ISAs


ACTIVE VS PASSIVE INVESTING

7 min read 21 Apr 21

By M&G Investments


Funds come in many shapes and sizes, and try to achieve different things using
their different approaches. There is a fundamental distinction to make between
two of the overarching approaches to managing a fund – active and passive
investing.



It’s important to understand the differences between these investment
philosophies which, to an extent, can be seen as polar opposites. In this
article, we outline the key points of differentiation, as well as some of the
pros and cons of each.


1. ACTIVE...

Actively managed funds are run by professional experts who make investment
decisions on your behalf.

Each active fund will have its own specific investment objective – beating the
average returns of a stockmarket or paying a growing level of income to its
investors, for example. This should tally with what you want or need from
investing, not least your attitude towards risk.

In line with what the fund sets out to achieve, managers will invest in a range
of individual assets – company shares or government bonds, for example – that
collectively comprise the assets of the fund, which individuals can then access
in one single investment.

Active fund managers believe that by using analysis, research and proven
investment processes to make informed decisions, it is possible to outperform
the market. Rather than following the herd, active managers aim to make
better-than-average calls and, in turn, deliver better-than-average returns to
those who invest in their fund.

Fund managers will charge for investing your money. If your investments are
successful, the returns should have the potential to outweigh the costs of
investing.


2. PASSIVE...

In contrast to active funds, passively managed funds look to closely track the
performance of a particular market benchmark or index.

The composition of a passive fund will therefore be closely aligned to the
basket of assets that comprise that market index. For example, a passive fund of
UK company shares might invest in the companies that comprise the FTSE 100
benchmark index in line with their relative weight in the index.

A passive fund, by design, should rise and fall in line with the market index
that it tracks. While this reduces the risk that your investment will
underperform relative to the overall market, it also means that it won’t be able
to meaningfully outperform – unlike an actively managed fund. Exchange-traded
funds (ETFs), which track a given market index but trade like a stock throughout
the day, are a popular form of passive investing.

Passive fund charges tend to be lower, sometimes much lower, than for active
funds, because there is less ‘added value’ by the provider, in the form of
expertise or research needed to pick individual assets.



Active Passive Choice of investment strategies to suit your own financial goals
Typically involve lower investment charges Potential for above-average
investment returns, even when the overall market is falling Less danger of
significantly underperforming the overall market




3. WHAT WE BELIEVE...

At M&G we are firm believers in the benefits of active management – but we also
recognise that some investors will prefer lower-cost passive management.

In our view, both active and passive strategies can play a role in a
well-balanced portfolio.

While the value of index-tracking funds will rise and fall in line with the
broader market, a good active fund manager will be able to pursue opportunities
that could perform well even if overall market values are falling.

Active investors can also be responsible investors. At M&G, we see part of our
job as a responsible investor is to consider all factors which might materially
affect long-term investment outcomes, including environmental, social and
governance issues, and we can incorporate these into our investment decisions.


IMPORTANT INFORMATION

When you're deciding how to invest, it's important to remember that past
performance is not a guide to future performance, and that the value and income
from the fund's assets will go down as well as up. This will cause the value of
your investment to fall as well as rise and you may get back less than you
originally invested.

We’re not able to give any financial advice, and the views expressed in this
article should not be taken as any kind of recommendation or forecast. If you’re
unsure about the suitability of your investment, please speak to a financial
adviser.


By M&G Investments
 * Tagged topics:
 * Article
 * ISAs
 * ESG
 * Sustainability

The views expressed here should not be taken as a recommendation, advice or
forecast.

The value and income from any fund's assets will go down as well as up. This
will cause the value of your investment to fall as well as rise. There is no
guarantee that any fund will achieve its objective and you may get back less
than you originally invested. 




RELATED INSIGHTS

 * Impact
   
   Measuring the carbon intensity of portfolios – An Explainer
   
   6 min read8 Jun 21

 * The Climate Emergency and the role investors can play
   
   7 min read9 Nov 20

 * Investing for impact: profit with purpose
   
   3 min read20 Oct 19

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