Investing basics
Active investing makes discretionary choices in an attempt to improve on a reference point; passive investing follows a predefined index or rule. Both still involve objectives, costs and implementation choices.
Make it click
One traveller chooses turns as conditions change; another follows a route marked in advance. Either can arrive efficiently or poorly, and the fair comparison includes time, errors and the cost of travelling.
Now put that into markets
An active manager selects and weights investments using judgment or a model. A passive fund implements an index methodology, accepting the index's composition rather than trying to outguess it.
Active results depend on security selection, timing, risk taken and fees. Passive results depend on index construction, tracking and fees. Performance should be compared with an appropriate benchmark over a relevant period.
Ask what decision is genuinely active. A rules-based product can make strong factor or sector choices, while an active fund may stay close to its benchmark.
The labels are not quality grades. Low cost cannot rescue an unsuitable exposure, and past active outperformance does not show whether skill, risk or luck caused it.
Takeaway
