A passively or actively managed fund? How they differ from one other

Active fund management

With active management, a fund manager  Fund managers professionally manage the assets in a fund. They are usually a team of qualified specialists. They make investment decisions for the fund and adhere to investment conditions, principles and legal regulations. Their activities are monitored accordingly. is used and expressly given the goal of outperforming a particular index. Fund managers decide on the composition of the fund  A fund is a “pot” into which investors put money. This is invested by the fund management in various securities, such as shares or bonds, based on certain criteria. This means good diversification can be achieved even with a low level of investment. There are various types of funds: if a fund invests in shares, it is called an equity fund. Real estate funds invest in property., select the securities  Securities, as a generic term, covers various financial instruments. These include shares and bonds but also units in funds and structured products. according to specific criteria and make changes if necessary. They may, for example, buy more of a particular share or group of shares (overweight) or, alternatively, fewer of them (underweight) if they believe a company or sector will perform strongly or poorly. Through such proactive decision-making, they aim to outperform the benchmark index (for example, the SMI or FTSE). 

Passive fund management

Passively managed funds (often referred to as index funds or ETFs) always track an index. In contrast to actively managed funds, they do not attempt to outperform the benchmark index but instead track it as closely as possible. Investors who put their money into a passively managed index fund on the SMI, for example, are specifically investing in the 20 largest shares in Switzerland.

Do higher fees mean better performance?

This means that passive funds do not provide an opportunity for outperforming the index tracked. By contrast, this is possible with actively managed funds, but only if fund managers and their teams succeed in constantly generating a higher return than the index based on well-founded decisions. Investors incur higher costs for this as the fund managers select the securities based on their own evaluation and analyses, which leads to higher expenses. This is why it’s important to compare the performance of active and passive funds after deduction of the fees. If the active fund produces better net return than the passive fund in such a comparison despite the higher costs, this is no guarantee for the future, but it is a strong indication that the fund manager has selected the securities wisely. However, it may be difficult for many fund managers to consistently outperform the market.

A combination of active and passive management styles

Investors don’t necessarily have to choose between actively or passively managed funds as there are now also funds that mix active components with passive ones, providing a combination of both management styles. The fund manager decides which components to manage actively and which will remain passive. These funds aim to combine the benefits of both management styles.

Which investment style is right for me?

Whether active, passive or mixed – the key factors in your choice are ultimately your personal outlook and investment objectives. If you have decided to invest and are comparing funds with different management styles, the net return can be a good comparative indicator. What’s important is not short-term comparison but a comparison over the last three to five years. Alternatively, you could consult independent financial sites online. When making your choice, you shouldn’t expect to have the best-performing product in your custody account at all times. If it’s in the top third, it’s performing well. Your investment advisor would be pleased to help you with selecting the right funds.