Basics: What are Actively Managed Funds?
Let’s get back to basics! This series unpacks commonly misunderstood terms so you can level up your financial vocab.
Investing is an important part of financial strategy for many Canadians.
Investment can take many forms, and you can invest via many different avenues, from buying stocks to opting into a mutual fund.
Even buying a bar of gold and burying it in your yard with the expectation of reselling it at a higher price could be considered investing—though it could also be considered absolutely nuts. So.
You might consider investing via actively managed funds instead. What in the heck is that? We’ll tell ya!
What are Actively Managed Funds?
Actively Managed Investment Funds are… exactly what they sound like. They’re often unique funds hand selected to your specifications, and then managed by an investment fund manager or an entire team of managers.
The idea behind actively managed funds is that your fund manager, in carefully buying or selling assets at just the right moment, can beat overall market performance, or “outperform” the market.
For example, say a stock market index tracks an average price increase of 6% (this is not a guarantee, merely an example!). Your actively managed fund would aim to beat a 6% return, though this doesn’t always happen.
The most common type of actively managed fund is a mutual fund. Mutual funds are types of investments where many people pool their money together to buy assets with the intention to achieve specific goals. Everyone with money in the mutual fund shares proportionally in the funds wins or losses.
It’s also possible to have an exchange-traded fund (ETF) which is actively managed. ETFs, when not managed actively, generally track a particular market index and perform in kind with that index. Actively managed ETFs can be designed to track your investment manager’s specific picks, or your own picks, for example.
However, actively managed funds bring much higher fees than passive management, and actively managed funds actually tend to underperform over time.
What are Passively Managed Funds?
By contrast, passively managed funds are also exactly what they sound like. Rather than selecting specific stocks or securities to purchase, passive funds generally track a particular market index. These indexes are designed to encapsulate or mimic the performance of an entire financial market segment.
As such, these funds perform in keeping with the overall growth or struggle of the market.
Passively managed funds are available through traditional investment companies, and they typically charge way, way less in fees than actively managed funds.
The biggest difference is that actively managed funds may beat the market, while passively managed funds by design will always simply track an index.
But when you compare the fees associated with passive versus active management, especially when taking into account the actively managed fund’s ability to actually underperform, it becomes less obvious if either of the two may be right for you.
Which Type of Investment is Right For Me?
If you’re looking for modest but consistent growth that you’ll retire with in 50 years, a passively managed fund may be exactly right for you.
If you’re able to buy into a mutual fund at work, an actively managed fund will likely be the pick of the lot. Or, if you’re looking to invest with a very specific strategy, or would like to join a high performing management fund, then that active management lifestyle could be for you.
In order to choose, you have to consider the pros and cons of each type of investment and consider how each aligns with your goals.
Actively Managed Funds Pros & Cons
A quick rundown of things we like and things we hate:
Pros
• Actively managed funds could outperform the market, potentially making you huge returns
• Actively managed funds have hands on experts to manage your funds in case of a downturn or extreme market shift
• Actively managed funds come with a manager that you can call up and either congratulate or be very mad at, depending on your fund’s performance
Cons
• Actively managed funds can be substantially more expensive. Generally, there are fees attached to buying and selling all assets held in the fund. These fees can take a chunk out of your return on investment even if the fund outperforms the market.
• Over time, actively managed funds have been found to consistently underperform their benchmarks on a risk-adjusted basis.
• Actively managed funds are typically more volatile than passively managed funds.
TL;DR: Actively Managed Funds
Actively managed funds are managed by a dude/dudette or a team of people whose jobs are to earn you returns on the money you invested. Sometimes they win big, sometimes they lose big. In both cases, they charge you money in the form of fees for their services.
If you think actively managed funds or passively managed funds could be right for you, be sure to do thorough research into what kind of product and what sort of management company best suits your goals. Investing is exciting but is inherently risky.
Do your research, and choose carefully!!
Now go forth and make wise investment decisions!
This blog is provided for informational purposes only, is not intended as investment advice, and is not meant to suggest that a particular investment or strategy is suitable for any particular investor. Always do your research before making any investment. If you’re unsure about an investment, you may wish to obtain advice from a qualified professional. Nothing herein should be considered an offer, solicitation of an offer, or advice to buy or sell securities.