Over the past decade there has been an increasing trend towards passive investing. A passive fund aims to deliver a return in line with a broad market index, often by directly replicating it. Active funds aim to outperform this index, by selecting only the best-performing components. Active funds come with higher fees, but not always higher returns.
Passives attract larger inflows
According to Morningstar data, passive funds have attracted larger inflows than active funds every year for the past 10 years, as investors seek cost-effective and broad-based market exposure. Long-term exposure to the market has proven to be a historically successful strategy. Taking rolling periods of 10 years between 1986-2024 an investment in UK equities would have provided positive returns 100% of the time (past performance is not a guide to future returns).
A place for both active and passive
Not all asset classes are ‘efficient’, meaning there may be opportunities to add value via active management. The chart below demonstrates the success rate of some selected active asset classes. While almost 60% of GBP corporate bond managers have outperformed their benchmark over the past 5 years, other asset classes have fared less well.
Ultimately, as the chart indicates, there is a place for both active and passive investing. This decision depends on the asset class, as well as an individual’s investment goals. All investing requires active decision making and the choice between approaches is not binary. Instead, the two approaches can complement each other to create an efficient portfolio.
[i] Lumin’s in-house discretionary investment team use both active and passive products across a range of investment solutions. Our portfolios are actively managed as we aim to take advantage of market opportunities. Call 03300 564 446 to find out more, or get in touch via our contact form.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
