When allocating funds in a portfolio, one of the questions investors face is whether to use active or passive funds. Simply put, active managers try to beat their benchmark. They will try to pick the best countries, sectors or stocks, and gather them up in a portfolio with the expectation that their return after fees will be above their benchmark index. Active fund managers claim they can beat the market, i.e. they can interpret information much better than other market participants and generate superior returns. While some can deliver stellar returns, the reality is that very few active managers can achieve exactly what they claim. That was the case in 2019 and will probably be the case this year too. Yet investors often pay a hefty price for active management. The reason for this underperformance is simple, according to the tenants of Efficient Market Hypothesis: investors compete to exploit with a profit any available information about earnings, macro and many other factors that affect the value of public companies. Stock prices adjust so quickly it is almost impossible to find mispriced stocks and exploit it for a profit. The problem with this theory is that it claims that those few who do indeed beat the market consistently are just riding on luck. If that’s the case, does it make sense to pay an active manager and when? If you’re looking for asset managers who can beat their benchmark in markets that are not completely efficient or are not efficient all the time. this is a prime time to employ the skill of an active manager. Technically this should be the case for any market, including in the US, despite its reputation of being one of the toughest markets to beat over the long run. The coronavirus crisis, and other episodes of market volatility – the fourth quarter of 2018, the Euro crisis in 2010-2012, the financial crisis of 2008, to name just a few – show that there are times when being active and daring to act and be contrarian can lead to outperformance.

“Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax reliefs depend upon individual circumstances and tax rules may change. The FCA does not regulate tax advice. This newsletter is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as of December 2020 and the contents of the Finance Bill. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.”