Why M&G believes in active investing

18/03/2019

A M&G, we passionately believe in the power of active investing.

You might have read about the so-called “active versus passive” debate in the financial pages. In our view, this is something of a false dichotomy – both types of investment strategy can play a role in a well-balanced portfolio.

Glossary

For explanations of the investment terms used throughout this article.

View the glossary

First things first, here’s the distinction:

Active investors will follow their own convictions and make investment decisions on a case-by-case basis in pursuit of specific investment goals.

Passive investors, in contrast, look to mirror the performance of a particular market benchmark, like the FTSE 100 Index of UK-listed companies.

An attraction of the passive approach is that it can offer a cheaper way to invest. Exchange-traded funds, or ETFs, which track a given market index but trade like a stock, are a popular low-cost option.

The investment charges on passive funds tend to be lower for a reason, however. Unlike active fund managers, there is little ‘added value’ in passive products, which by design will follow a market benchmark up or down.

Active fund managers use professional expertise and processes to hand-pick individual assets for their portfolio, in pursuit of a stated investment objective – for example, beating the average returns of a stockmarket or paying a growing level of income to their investors.

1. What an active approach can offer

Importantly, the objective of an actively managed fund may resonate much more closely with your personal investment goals than a passive fund whose goal is solely to track a wide index of assets.

Unlike index-tracking passive funds, active investment approaches can also deliver outperformance.

While a rising tide might lift all boats, active fund managers can pursue opportunities that could perform well for their investors even when overall market values are falling – and passive funds with them. Looking at the bigger picture is one of the main ways that active investors can achieve higher returns over the long term.

No matter what the prevailing economic conditions, at M&G we believe there are opportunities to be found for investors with a rigorous approach to navigating the opportunities and challenges of the markets.

2. Why now

We believe that a widespread focus on avoiding short-term losses, or simply the unwillingness to tolerate short-term rises and falls in value (volatility), over recent years has driven up the price of certain assets perceived as ‘safer’ investments beyond appropriate levels.

When reviewing your approach to risk and returns, it is worth remembering that volatility is not the same as risk. In our opinion, true risk is the possibility not of temporary paper losses, resulting from day-to-day market volatility, but of protracted or permanent losses.

Taking investment risk and accepting the associated volatility might be uncomfortable at times, but a total aversion to volatility can prove costly when the price of low volatility is high.

Moreover, when risk is being mispriced, as we believe it is widely today, it creates opportunities for active investors who are willing to take a long-term view and accept a level of risk that is right for them.

3. Why M&G

For over 85 years, M&G has built a strong reputation for investment integrity, original thinking and innovation, pioneering many new products designed to meet the needs of our investors.

We have no single style of investment. Instead, we prefer to give our fund managers the freedom to pursue their own approach, backed by the resources and expertise that our size and scale can offer. This allows them to act on their convictions without being constrained by a rigid house style.

We believe we can deliver the best returns for our clients through active management by developing a deep understanding of the individual assets we invest in.

Taking a long-term view, ignoring market noise and passing fashion, is not always the most comfortable approach. However, we firmly believe that by actively investing with conviction we can generate attractive returns for our investors.

Important information

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. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested.

We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser The views expressed in this document should not be taken as a recommendation, advice or forecast.