Blending with active

Building an investment portfolio involves multiple steps:

  • Choosing the types of stocks and bonds you wish to gain exposure to
  • Choosing the tools you would like to use to gain the exposure
  • Identifying how much risk you are comfortable taking and how long you plan to stay invested

 


Before you get started it is important to note that in either case capital is at risk. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.

Combine the characteristics of active and passive investments

Mutual funds are popular investment products as they provide diversified market access in a single vehicle. Mutual funds can be active or passive:

  • Active funds are those where a fund manager chooses and weights the individual funds’ holdings according to their own investment approach. In order to seek to outperform popular benchmarks, such as the FTSE 100 as well as other fund managers, active fund managers often take a strong view. This approach can lead to outperformance but also underperformance.
  • Passive funds aim to track a benchmark, meaning that they intend to return the same as their benchmark, minus any fees. Passive funds tend to be cheaper than active funds and can be used as individual portfolio building blocks. 

With their low cost building-block approach, passive funds such as ETFs can make it easy to gain market exposure. They can complement thoughtfully chosen active strategies, combining the potential for outperformance with market returns. All investments involve an element of risk, and performance, including the value of the initial investment, cannot be guaranteed in any case, but blending these two approaches can improve your portfolio and help you to meet your investment objectives such as growing your wealth or generating an income stream.

Example: Express your view on UK equities

An investor believes that the UK economy is performing well and thinks that smaller companies have the potential to outperform over the long term. He would like to invest in smaller companies but is concerned that their performance might be volatile. To gain access to smaller companies, the investor chooses an active manager who has a long term track record of outperformance in the small company sector in the UK, albeit going through periods of significant underperformance at certain times. To seek to balance this higher volatility exposure, the investor chooses a FTSE 100 ETF, which provides cost-efficient exposure to the UK’s largest companies, therefore maintaining broad exposure to the UK economy but diversifying away from smaller companies. Again its is important to remember that all investments involve an element of risk, and performance, including the value of the initial investment, cannot be guaranteed in any case.

Get started with our low cost Core funds or view our full product range to find the right ETF for your portfolio.

Capital at risk. All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed.

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