Investment fund styles
Actively managed funds
This type of fund has its investments chosen by a Fund Manager. Each fund will have its own objective – the manager’s job is to select the investments that best match this objective.
The fund will also operate within a set of rules. These set out the types of investments it can hold and are explained in the Fund Factsheet and Key Investor Information Document (KIID). As long as they work within the rules, Fund Managers can use their own judgement to select the investments they feel will perform best.
Most funds compare their performance to an index . For example, a UK equity fund might compare its performance against the FTSE 100 or FTSE 250, depending on the investments it holds. In an actively managed fund, the Fund Manager attempts to ‘beat the market’. Obviously, Fund Managers can’t outperform all the time, but they hope the investments they select will do better than their chosen index over the long-term. This gives investors the chance to earn better returns.
However, this active style of management comes at a price – investors usually pay higher annual charges for actively managed funds. When you take these charges into account, the overall potential returns for actively managed funds can be lower than for passive tracker funds, explained below.
Passive tracker funds
Although a passive fund still has a manager, the investments are selected automatically in line with the fund’s objectives. Most passive funds track an index like the FTSE 100 or Standard & Poor’s 500 (S&P 500) but the aim isn’t to beat it, simply to match it. To achieve this, the fund will usually invest in all the parts of the market sector. So if the market falls or rises by 30%, the fund should too.
Charges for this type of fund tend to be lower because there’s less day-to-day management involved.
There are thousands of funds available, so you should always be able to find one that meets your investment goals. Of course, whichever fund you choose, you need to be prepared to take a risk with your money because you could get back less than you invest.
While having such a wide choice of funds is a good thing, it can seem a little daunting – especially if you’re just starting out. To make choosing between funds simpler, they’re classified into 29 sectors. These cover UK and international markets, different sectors of the developed markets and different asset classes, eg, bonds or shares.
Each sector is made up of funds that invest in similar assets or within the same geographical region, eg, UK Smaller Companies, Global Emerging Markets and North America.
By having funds ordered in this way, it makes it easier to find the ones that might suit you. Different sectors can have different risk profiles, so one of the first things you need to do is think about how much risk you’re willing to take.
Once you’ve decided on a sector, you can then start to compare the funds that sit within it. This is easier when you narrow down your choice to a particular sector, because the funds you’ll be comparing will have similar goals or hold similar assets.
Which style of fund?
It's also important to consider which style of fund you’d like to hold, because different Fund Management companies have different approaches. Some active managers take a team approach to selecting investments, involving a number of Fund Managers in the research and decision making.
Others use a 'star' Fund Manager approach, where the investments are selected by one person. While some star Fund Managers might have excellent track records, this is based on past performance, which is not necessarily a reliable indication of future performance. And if the Fund Manager leaves the company, or the market conditions no longer fit their unique approach, this can lead to reduced returns.
Both these styles of active fund management have their benefits and drawbacks. Many investors will combine aspects of the 2 approaches, looking to get the best of each.
Things to remember
The value of funds can go down as well as up. It doesn't matter how much research you do or which techniques you use when selecting funds, there's always a risk that you could get back less than you invest. Funds are medium- to long-term investments (5 to 10 years) so they may not be suitable for everyone.
Barclays Stockbrokers doesn't offer advice. If you’re unsure whether a fund is right for you, please seek independent financial advice.
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