Active vs. Passive investing: understanding the costs

The debate between active and passive investing has divided the investment world for years. Supporters on each side regularly weigh up the pros and cons, but for new investors, it’s important to understand the key differences.

What are Active and Passive Investments?

• Passive investments aim to replicate the performance of an index, such as the S&P 500 or the FTSE 100, by investing in the same stocks or bonds. These funds are usually automated, require minimal management, and typically have lower fees.
• Active investments, on the other hand, are managed by professionals who aim to outperform the market by selecting assets they believe will perform better than the index. These funds tend to be more expensive because you’re paying for the manager’s expertise and research.

FundCalibre’s perspective on active management

At FundCalibre, we favour the active approach but acknowledge that not all actively managed funds are equal. Even the best managers can underperform at times. That’s why we use our proprietary tool, AlphaQuest, to evaluate fund managers’ performance beyond market movements, focusing on their consistency in adding value.

For us, the most important factor is net returns after fees. While cost is always a consideration, sometimes paying a little more for strong performance can be worthwhile.

Orbis Global Balanced: A fee structure unlike any other

One fund that stands out is the Orbis Global Balanced fund, which has a unique fee structure designed to align the interests of investors and fund managers. This fund charges no ongoing fees. Instead, Orbis charges a 40% outperformance fee if the fund beats its benchmark (a mix of 60% MSCI World Index and 40% JP Morgan Global Government Bond Index) hedged into sterling.

Any performance fees are placed in a reserve fund that can be used to refund investors in case of future underperformance, at a rate of 40% of the underperformance. The manager’s fee is then drawn from this reserve, capped at either a third of the reserve or 2.5% of the fund’s net asset value per year.

This structure is designed to ensure the management only benefits when the fund performs well.

Top 10 cheapest funds on FundCalibre

With fees in mind, here are the 10 cheapest funds and trusts available on FundCalibre, based on their ongoing charges figure (OCF)*:

Top 10 cheapest equity funds on FundCalibre

For those investors specifically looking to add actively-managed equities to their portfolio, here are the 10 cheapest equity funds and trusts available on FundCalibre, based on their ongoing charges figure (OCF)*:

*Source: FE Analytics, 6 September 2024