Reducing the value of investments is always important, while in turbulent times, when most portfolios are falling, it is absolutely necessary to preserve your wealth.
One way to figure out if you’re getting good value for money is to look for a little-known number, known as an active promotion.
Investment experts use it as a measure of how hard fund managers are working for them. Then, if they find that their fund managers don’t justify their fees, they can forgo them in favor of a cheaper option. This is a tool that ordinary investors can also use.
Indicator: One way to determine how good your money is is to look for a little-known number known as an active stock.
Beware of trackers in the closet
There are two main approaches you can take when investing. You can either buy an active fund, which is a collection of investments selected by an experienced fund manager. Or you can choose a passive fund that buys all investments in a specific index. For example, a passive fund that tracks the FTSE 100 simply buys all 100 UK companies in that index.
Active funds tend to cost more because you pay to have someone pick your investments. It is hoped that their expertise will enable them to identify the best investments and earn higher returns than the index they are benchmarked against.
But here investors need to be on the alert. Sometimes active fund managers simply put together a portfolio that looks almost identical to the index they are trying to beat.
These funds are so-called hidden trackers because they pretend to be active funds but in reality do nothing more than stick to their benchmark.
“Given the additional fees that actively managed funds charge, it makes little sense to invest in one that constantly looks like the benchmark it is trying to beat,” says Ryan Hughes, head of investment partnerships at investment platform AJ Bell.
A new analysis by investment platform Interactive Investor has revealed that ten percent of all investment funds are “mystery trackers.”
The strength of the active share
The active share is a measure of how different a fund’s portfolio is compared to its benchmark. Expressed as a percentage. So, for example, if a fund has an active stake of 40%, 60% of its assets will be the same as a passive fund that follows the same benchmark.
Jason Hollands, managing director of asset management firm Evelyn Partners, says: “Equity is essentially the degree to which a portfolio differs from its benchmark index.
“So a high active share is a sign that the fund is taking a bolder stance than the index in the hope that investors will outperform.”
How to choose the right number
As a general rule, if you are paying for active fund management, you should expect a high active share. Hughes says that funds with more than 80% active equity should be seen as “quite different from the benchmark.”
He adds: “Less than that, investors would probably be better off investing in a cheap tracking fund.” Rob Morgan, an investment analyst at brokerage Charles Stanley, says more than 70% of active shares is a “good sign.”
“There is no right or wrong number,” Morgan says. “But we like to see a high figure to showcase the differentiation of an active investment approach.”
James Yardley, an analyst at investment group Chelsea Financial Services, says investors should consider an active stock over time.
“There may be times when good fund managers reduce their active share to 60% due to market conditions, but then they may increase their active share to 80% in the future,” he explains.
Ask your broker for a number
Some fund managers, such as Edinburgh’s Bailey Gifford, disclose their active holdings in their monthly newsletters, while others do not.
“If I were being cynical—and I am—it’s no surprise that funds that publish this ratio tend to have high asset shares,” says Kyle Caldwell, collaborative editor at investment platform Interactive Investor.
“Funds are not required to publish this ratio, so it is not widely available. But that’s the way it should be.
Chelsea’s Yardley suggests asking your stockbroker if an active stock is showing up in your fund’s newsletter. There are also a few quick checks you can do to give you some idea of whether a fund has a low or high active equity:
- Check fund performance: If a fund closely monitors the performance of its benchmark, it could be a secret tracker. If he has good and bad years compared to the index, he probably has a high active share.
- Check the number of holdings: a concentrated fund of 20-40 holdings is likely to have a high active share. Yardley says a fund with more than 150 assets is often a wake-up call for an undercover spy.
- Look at the top ten stocks: if the list of the top ten stocks a fund owns is just a list of familiar stocks, the active share is likely to be low.
Save on commissions with cheaper trackers
If you find that some of your funds have low active equity, replacing them with cheaper tracking funds can save you some serious money while delivering similar investment results.
Hughes says investors can expect to pay around 0.85% per year for most hidden trackers. Replacing them with cheap passive funds charging as little as 0.07% per annum, such as the iShares FTSE 100 tracker, would save around £150 annually, Hughes said. This is based on an investment of £20,000.
Hughes adds: “These savings are significant and will make a huge difference to investor wealth in the long run.”
Selection of budget fund experts
There are several cheap tracker funds that you could use to replace your closet trackers. Like iShares…
Credit: www.thisismoney.co.uk /