Active versus passive investing: Part 2 – Is it worth paying management fees?
by Allan Gray, Portfolio Manager, CIBC Wood Gundy
As a refresher, passive investments attempt to mimic the composition of a market and produce results that are similar to that market. Passive investments include index mutual funds and most ETFs, and generally charge lower management fees than active funds. On the other hand, the main objective of active funds, which are run by portfolio managers, is to provide investors with better returns and/or lower risk than the market.
Is it worth paying the higher management fees for active investing? Some active funds outperform their relevant index after fees. However, many do not. On the surface that tells us that if we were simply choosing funds at random, we’d be better off choosing a passive index fund with lower fees, assuming a long time horizon (will differ depending on your current situation).
Active managers are experts in market or stock fundamentals. That means, they analyze company-specific data that can help them understand the value of a particular stock and if it’s a buy or sell opportunity. This is an important advantage that can help investors earn better returns.
Every market has “cheap” or “expensive” periods relative to its own history. Active managers can provide counter-cycle benefits by becoming more aggressive in cheaper markets and more conservative in expensive ones. In addition to these top-level calls, a good active manager is constantly re-assessing where the best prospective returns in the market may come from. Are formerly depressed companies about to recover? Are some companies potential acquisition targets? This type of research can help drive significant return differentials for active managers.
In addition, active managers have access to a wide array of securities, whereas passive funds hold only the securities within the index they are tracking. For instance, the TSX 60 has a limited pool of 60 securities.
I believe it pays to consider the true value that can be delivered through active management. I look for active mutual funds that have track records of beating their representative index after fees while offering downside protection. Depending on your current situation, investing with an active fund manager could be the right formula for you.
To learn more call Al at 403 266-0160 or 803-9007(cell), or email email@example.com
Allan Gray is an Investment Advisor and Portfolio Manager with CIBC Wood Gundy in Calgary, Alberta. The views of Allan Gray do not necessarily reflect those of CIBC World Markets Inc. CIBC Wood Gundy is a division of CIBC World Markets Inc., a subsidiary of CIBC and a Member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada. If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor.