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The power of active fund management

A large number of UK investment funds are managed actively.  Why?  Because it is believed that many investors prefer their capital to be invested according to the judgement of a skilled industry professional, rather than have it simply reflect the performance of a particular index. 

At M&G we strongly believe that active funds have the potential to generate the best returns for investors over the long term. Backed by all the resources scale can offer, our fund managers are free to develop their own individual investment strategies and act on their convictions.

Please remember that prices may fluctuate and you may not get back your original investment.

What kind of investor are you?

'Passive' or index investing is a strategy that aims simply to replicate the returns from a particular index, such as the FTSE 100 Index of leading companies in the UK. One advantage is that this type of fund tends to have lower charges than an active fund. This is partly because the stock selection and allocation is performed primarily by computer programmes and there is no need for the extensive research and support teams who contribute towards an active approach.

Active investing aims to beat the returns from the stock market, an index or a specific sector.  The strategy is based on the belief that a fund manager who is able to select the right stocks and accurately anticipate changes in market conditions could have the potential to outperform the stockmarket and achieve superior returns.  Charges are higher than for passive funds because you are paying for the expertise of the fund manager and the research team.

Please remember that prices may fluctuate and you may not get back your original investment.

What makes a good active investor?

The intelligent, active investor aims to beat the market and is not prepared to simply settle for average returns. To achieve this, they need to:

• have the confidence and knowledge to set their own investment objectives;
  
• be prepared to pay for the expertise to achieve their aims; and
  
• understand the risks of stock market investing which need to be taken into account when considering the potential returns.

Active investors and active investment management companies also look at the bigger picture.  They keep a watchful eye on the key themes and structural shifts in economies and consumer behaviour that may have investment potential.  They then invest in those companies or with those fund managers who they believe are best placed (and have the most relevant experience) to exploit these opportunities.

Passive investing also carries its own type of risk. One such risk comes from the necessity for passive funds to replicate the stocks in an index as closely as possible. This may not always be beneficial, or enable investors to hold a well diversified portfolio. 

For example, in June 2011 over half of the FTSE 100 Index was concentrated in just three sectors –financials, oil & gas and basic materials*. The losses suffered by the banks during the global financial crisis in 2008 weighed heavily on the FTSE 100 Index. Any fund attempting to replicate that Index at the time would have seen their performance closely linked to the fortunes of this sector.

Past performance is not a guide to future performance, prices may fluctuate and you may not get back your original investment.

*Source: FTSE Group, as at 30.06.11