Actively Managed Funds: Where To Invest Your Money?

Actively managed funds are a type of investment fund that aims to beat the market by using professional money managers to hand-pick investments. These funds have the potential to outperform the market and offer higher returns, but they also come with higher fees and tax costs. When deciding where to invest in actively managed funds, it is important to consider the risks and potential benefits. Some factors to consider include the fund's performance history, the expertise of the fund managers, the level of risk involved, and the fees associated with the fund. It is also worth noting that actively managed funds can be a good way to diversify your portfolio and should be chosen with long-term goals in mind.

• Potential for higher returns
• Active funds can add value to a portfolio and offer an opportunity for outperformance
• Active fund managers have more flexibility in the selection process
• Active funds allow for better tax management and more nimble risk management | | Disadvantages | - Actively managed funds generally have higher fees and are less tax-efficient than passively managed funds
• There is a risk of underperformance where the portfolio manager does not beat the benchmark
• Active funds may have more taxable capital gains due to more frequent trading | | Examples | - Avantis U.S. Equity ETF (AVUS)
• Dimensional US High Profitability ETF (DUHP)
• PIMCO Enhanced Short Maturity Active ESG ETF (EMNT)
• Invesco Russell 1000 Dynamic Multifactor ETF (OMFL)
• Avantis International Small Cap Value ETF (AVDV) |

Mutual funds

When investing in mutual funds, it is important to consider the fees associated with them, as these costs will impact your overall investment returns. Some common fees include expense ratios, sales charges or loads, redemption fees, and other account fees. It is also important to understand the different types of mutual funds available, such as stock, bond, money market, index, and target-date funds, each with its own investment focus and strategy.

Actively managed mutual funds are those where fund managers actively select investments based on their expectations for their performance. These funds aim to outperform the market and typically come with higher fees due to the active management involved. On the other hand, passively managed funds, also known as index funds, aim to mirror the performance of a specific market index, such as the S&P 500, by holding the same or similar securities.

When choosing between actively and passively managed funds, investors should consider their risk tolerance, investment goals, and fees involved. Actively managed funds may offer the potential for higher returns but also carry the risk of underperformance. In contrast, passively managed funds offer a more straightforward approach with typically lower fees.

Overall, mutual funds provide investors with an accessible way to invest in a diversified portfolio of assets and can be a suitable option for those looking to grow their money or generate income. However, it is essential to carefully consider the fees, risks, and potential returns associated with different types of mutual funds before investing.

Index funds

• Costs and fees: Index funds have lower fees than actively managed funds because they require less work. The main cost of an index fund is the expense ratio, which is a percentage of a fund shareholder's overall investment that is subtracted from their returns. Other costs may include investment and account minimums, and tax-cost ratios.
• Performance: Index funds don't aim to beat the market but rather to match it. Over the long term, index funds have often performed better than actively managed funds. The S&P 500, for example, has posted an average annual return of nearly 10% since 1928.
• Risk: Index funds are typically less risky than individual stocks because they are diversified. An index fund usually contains hundreds of stocks, so if one stock performs poorly, it is likely that another will perform well to offset the loss.
• Tax efficiency: Index funds don't change their stock holdings as often as actively managed funds, which can result in fewer taxable capital gains distributions and a lower tax bill for investors.

When deciding where to invest in index funds, it's important to research and analyze different funds, decide which fund to buy based on costs and other factors, and choose a broker or fund company to purchase the fund from. It's also crucial to keep an eye on the fund's performance over time and make sure it's meeting your investment goals.

Risk and performance

Actively managed funds are an investment option for those who want to beat market returns. They are handled by professional money managers who hand-pick investments to outperform a designated benchmark. While these funds offer the potential for higher returns, they also come with higher fees and increased risk.

When considering actively managed funds, it's essential to understand the associated risks and performance expectations. Firstly, these funds generally carry higher fees than passively managed funds due to the sustained efforts of investment advisors. The average expense ratio for an actively managed equity fund was 0.66% in 2022, while passively managed funds had average expense ratios of 0.05% in the same year. The higher fees can eat into the potential returns, so investors should carefully evaluate the actual returns after fees.

Secondly, actively managed funds carry the risk of underperformance. While the goal is to beat the market, there is no guarantee of success, and these funds may sometimes underperform their benchmarks. This underperformance can lead to lower returns than passively managed funds, which aim to mirror the market's performance. Therefore, investors opting for actively managed funds should be comfortable with taking on this additional risk.

Additionally, actively managed funds tend to have higher portfolio turnover, resulting in more taxable capital gains. The frequent buying and selling of investments by fund managers can trigger capital gains taxes, making these funds less tax-efficient than passively managed funds. This is an important consideration, especially for non-tax-advantaged accounts.

Despite the risks, actively managed funds offer benefits such as the expertise and experience of fund managers, who employ various strategies to identify and select investments. They have more flexibility in the investment selection process and can nimbly manage risks. For example, during the Brexit vote in 2016, an actively managed global banking fund might have reduced its exposure to British banks due to heightened risk levels.

In summary, actively managed funds present a trade-off between higher potential returns and increased risks. Investors need to carefully consider their risk tolerance, evaluate fund managers' track records, and assess the impact of fees and taxes on their overall returns.

Advantages and disadvantages

Actively managed funds are a type of investment fund where a professional money manager or a team of professionals actively tracks the fund's performance and makes buy, hold, and sell decisions about the assets in it. The goal of active management is to outperform a designated benchmark while managing risk, increasing income, or achieving other goals such as adhering to environmental, social, and governance (ESG) standards.

Advantages:

• Expertise and Experience: Actively managed funds employ the expertise, experience, and judgment of professional fund managers, who use their deep research and expertise to hand-select investments for the fund.
• Flexibility: Active fund managers have more flexibility in the selection process compared to index funds, allowing them to make investment decisions based on their judgment and the specific goals of the fund.
• Risk Management: Active fund managers can nimbly manage risks by reducing exposure to certain investments or using hedging strategies such as short selling and derivatives.
• Tax Benefits: The flexibility to buy and sell investments allows active fund managers to offset losers with winners, providing tax benefits to investors.

Disadvantages:

• Higher Fees: Actively managed funds generally have higher fees than passively managed funds due to the sustained efforts and expertise of investment advisers.
• Underperformance Risk: Active fund managers may underperform their designated benchmark, adding an extra layer of risk for investors.
• Tax Inefficiency: Actively managed funds may have more taxable capital gains due to frequent trading, making them more tax-efficient to hold in certain types of accounts, such as IRAs.
• Management Abuses: There is a potential for management abuses, such as unnecessary trading, excessive replacement of investments, or selling losers before quarter-end to manipulate performance numbers.

Long-term investing

Identifying Goals and Risk Tolerance

It is essential to define your investment goals and risk tolerance before investing in actively managed funds. Ask yourself whether you are seeking long-term capital gains or current income. Are you investing for retirement, or do you have shorter-term financial goals in mind? Understanding your risk tolerance is crucial, as it will influence the types of actively managed funds you choose. Consider whether you can tolerate significant swings in your portfolio's value or if a more conservative approach is preferable.

Time Horizon

Types of Actively Managed Funds

When selecting actively managed funds for long-term investing, consider the different types available:

• Growth and Capital Appreciation Funds: These funds focus on long-term capital appreciation and typically hold a high percentage of their assets in common stocks. They offer the potential for higher returns but come with higher risk.
• Income Funds: Income funds prioritise current income over capital appreciation and are suitable if you need regular income from your investments. They primarily invest in bonds and other debt instruments that pay interest.
• Balanced Funds: If you want a mix of capital appreciation and income, consider balanced funds, which invest in both stocks and bonds. These funds offer a more conservative approach while still providing the potential for growth.

Evaluating Fund Managers and Performance

When choosing actively managed funds for long-term investing, it's crucial to evaluate the fund managers' track records and investment strategies. Assess their performance over the last three, five, and ten years, comparing it to relevant benchmarks. Consider factors such as volatility, turnover, and consistency in returns. Remember that past performance does not guarantee future results, but it can provide insights into the fund's management and strategy.

Fees and Expenses

Actively managed funds typically have higher fees and expenses than passively managed funds. Pay close attention to the expense ratio, sales loads or loads, management fees, and other charges. These fees can significantly impact your overall returns, so it's essential to understand them before investing. Compare the fees across different actively managed funds to find the most cost-effective options.

Diversification

Diversification is a key aspect of long-term investing. Spread your investments across different actively managed funds focusing on various asset classes, sectors, and geographic regions. Diversification helps to reduce risk and increase the potential for long-term gains.

Regular Monitoring and Rebalancing

Frequently asked questions