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Video debate: Active vs passive funds

The Interview

Is the active vs passive debate really so divisive? Personal finance writer Katie Morley invited one of the leading advocates of passive investing and one of the best known champions of active funds to a video debate entitled "Are actively managed funds a rip off?" - and found them agreeing with each other.

Unlike active investments, where fund managers choose which investments to buy or sell, passive funds simply replicate the returns of a specific index and hold on to those investments through thick and thin. With no active fund management involved, and no professional investment manager taking portfolio decisions, the fees charged for a passive investment tend to be less.

Our passive investing advocate is Alan Miller, a former active manager at New Star who founded SCM Private which invests using exchange-traded funds, low cost passive funds. He argues: "A lot of active funds are closet index trackers. If you look at their largest holdings they tend to be identical to the largest companies in the market. If you by an actively managed fund thinking it guarantees success when patently it doesn't then it is best to buy an index fund."

Mr Miller urges the active funds industry to show investors exactly where their money is invested, rather than just the top ten holdings of the fund, as is widespread practice. "It's your money and you should be able to see where it is invested."

Our active funds champion is Mark Dampier, head of research at Hargreaves Lansdown, responsible for selecting the firm’s Wealth 150 list of actively managed funds. He says: "About 95 per cent of active funds are absolutely hopeless. If you want to follow the FTSE directly then buy a pasive fund. We look for manager skill by generating a return we'd expect them to make and then plotting what they've actually done. If the second line is above the first line we call that skill."

However, he says that Hargreaves Lansdown's selection of active fund managers who they believe have genuine skill has been going down. "It's been a particularly tough environment over the last few years," he says. "It takes at least an economic cycle to assess the skill of a fund manager. You've got to see how someone performs over 5-6 years because people get lucky. People have that moment in the sun - they have 2-3 years of great performance and everyone floods into the fund. But that's often the point where you shouldn't buy." He concludes that investors should take the "best of both" - active and passive together.

Listen to the full debate below.

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By Katie Morley,
21 January 2013

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