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The World Cup and investing: does the manager matter?

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Summary

With the World Cup starting in Russia this Thursday, the beautiful game provides a useful analogy for the pros and cons of active and passive investing.

2 min read

Some people don’t see the point in paying an expert to actively manage their investments when cheaper products are available that simply mirror market movements. But there are benefits to each approach and the best strategy could be a mix of both.

Active investing is like the most hands-on football manager you can think of – someone who has a big say in picking the team and pays unwavering attention to every detail, from tactics to the players’ health, fitness and diet. A manager who is well-equipped to be flexible and react to what’s happening during a game based on lots of variables.

It’s all about poring over every detail, every day, to get the best performance. Germany’s national team is a good example of this – top-performing and able to adapt to almost anything the other side throws at it.

In investing, an active fund manager will:

  • constantly review your investments
  • make judgement calls based on their experience and expertise, backed by a wealth of analysis and research
  • work to beat the market and mitigate against risk

In both investing and football though, even those at the top of their game can get it wrong, so there is greater risk as well as potentially greater reward. It is also important to remember that active investment managers can’t always outperform the competition, and occasional dips in performance are to be expected.

“There’s a case for active and a case for passive but there’s an even better case for both.”
Daniel Shea, Investment Director

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The passive voice

Passive investing is more like a manager that picks the same 11 players for every game. It works when conditions are favourable but the team may struggle if the game starts going against them.

It is the ‘buy and hold’ approach of passive investing that makes it similar. Most passive strategies have a fixed asset allocation that involves taking a position and sticking with it over time. A good example is buying an index tracking fund that follows one of the major stock market indices like the FTSE 100 or Dow Jones. Your investment goes up or down in line with that index.

It is cheaper than active investing as you’re not paying someone to pick stocks for you. Just as a football manager has their most reliable players, passive investing can form a firm foundation for a diversified portfolio. It is also simpler to follow as the assets in the index involved stay largely unchanged – compared to active investing where trades are made.

On the other hand, a passive approach is more limited, involves being locked in to certain holdings and means your portfolio’s performance is unlikely to go beyond basic market returns.
 

Which one’s for you?

The good news is that, unlike football, you don’t have to support one at the expense of the other. As Daniel Shea, Investment Director at Coutts, says, “There’s a case for active and a case for passive but there’s an even better case for both.

“A passive element to your portfolio reduces your costs and could deliver a steady return over time, while using an active manager as well could see your investment outperform the market. You’re getting an expert to give your returns a lift while mitigating the risks involved by staying in line with market movements.”

Find out more about investment services at Coutts.

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

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