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Investors are increasingly won over by “passive” funds – which systematically track a given index – over those run by active managers, thanks in part to their simplicity and lower cost.
Sri Moorthy, 56, from Wimbledon, is one such investor. He has £600,000 in a portfolio of index trackers and exchange-traded funds (ETFs), including the Fidelity Index US, Fidelity Index World, Invesco STOXX Europe 600 ETF and SPDR Russell 2000 US Small Cap ETF. He is sceptical about active management.
“I would only go for an actively managed fund if I felt confident it was good value and they didn’t charge performance fees,” he said.
But Mr Moorthy also has £800,000 in cash. As he does not plan to retire for the next 10 years he can afford to risk more of his money in the stock market – but he is unsure which funds to pick.
He also has some exposure to emerging markets, Japan and the UK, but his portfolio is dominated by US investments.
“I have at least 50pc of my portfolio in the US. The market seems to continually defy expectations, but I need to think where else there is value.”
We asked investment experts where Mr Moorthy should invest the £800,000 he holds in cash to grow his capital, without overlapping with his existing investments.
Darius McDermott, managing director at FundCalibre, an analyst, says:
Index investing offers a simple and cost-effective way to invest. However, it can be argued that the success of passive vehicles, in terms of performance, is largely tied to the era of easy money with very low interest rates following the 2008 financial crisis.
Now, as we enter a more normalised economic and interest rate environment, we believe markets are shifting in favour of active investors. While Mr Moorthy’s portfolio already has broad geographic diversification, relying solely on passive index funds limits its tactical flexibility.
Asia ex-Japan, for example, with its diverse composition and rapid economic evolution, is where an active approach is likely to be more fruitful than a passive one. Countries such as China, India, Korea, and Taiwan display distinct characteristics, creating unique challenges and opportunities.
Skilled active managers can navigate these complexities, identifying winning bets while mitigating risk. This includes the ability to avoid potential pitfalls such as companies with poor corporate governance – a critical issue in this region, which you would have no choice but to own in a passive fund.
The Fidelity Asia Pacific Opportunities Fund is a strong candidate for any investor looking for an Asian equity fund, with its high-conviction and disciplined stock selection process offering a truly active approach.
Even in the US, a purely passive approach exposes Mr Moorthy’s portfolio to concentration risk. The S&P 500 index is more concentrated than it has ever been, and investors may not be aware of how much their portfolio is influenced by the share price of technology giants such as the Magnificent Seven.
