One of the most common questions we get asked is what are our fees. But investors need to look beyond those fees and look at what they’re paying an investment manager to do. Some investments are active and others are passive, and you can expect to pay different fees for these services. But you can also expect to receive different rates of return and levels of risk.
The difference between active and passive investment managers
Active investment means your investment manager is using their specific skills to make the best decisions for you. Their objective is for your investment to outperform in that area of the market. To achieve this they do more research and work to select what you invest in.
A passive investment often has a smaller fee but it involves less work from the investment manager. They may buy every single stock in the Australian equity market without discretion. This means your returns will reflect the market as a whole. In comparison, an active manager might hand-select just 20 or 25 stocks that they believe will outperform the rest of the market. So you get fewer stocks in your portfolio but these may perform better, so you’re paying a fee for investment expertise.
We’re an active investment manager, which means we have a team of analysts who travel around and visit companies that we’re thinking of investing in. We sit down with the management team, understand their business and make a clear-eyed assessment of whether we think it’s wise for you to own shares in that company. The fee might be slightly higher than buying the entire market, but you’re paying for results underpinned by research. The aim is to deliver greater returns over a longer period of time for our investors. For example, 2019 was a strong year for Australian equities. The Australian equity market was up about 23% and our actively managed Australian equity portfolio was up by about 32%, so people who invested with us received a return of close to 8% above the market.
Aiming to outperform through active management should also hold true in negative markets like what we’ve experienced at the start of 2020. By focusing on stocks that we believe will outperform and avoiding those that are higher risk our larger company Australian equity portfolio has been able to outperform the broader market by more than 1% and our smaller company Australian equity portfolio has been able to outperform its market by more than 5%, limiting the downside for our investors.
In comparison, a passive investment manager doesn’t need analysts to do the groundwork because they buy everything, whether it’s good, bad or ugly. There are plenty of these providers around that give you low fee options without the investment expertise.
When choosing an investment manager, it’s really up to you. You can choose a passive manager who may be a bit cheaper but doesn’t actively manage your portfolio. Alternatively, you may like to pay a little more for an investment portfolio that’s managed for you, but that you may get a better return out of it in the long run, so your fees represent money well spent.
Dominic Mlcek is a Portfolio Manager at Viridian Advisory
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