If you want to invest in a portfolio of assets but don't have the time or inclination to do the legwork of picking the investments yourself, you might want to read up on passive funds.
What is a passive fund?
A passive fund is an investment vehicle that tracks a market index, or a specific market segment, to determine what to invest in. Unlike with an active fund, the fund manager does not decide what securities the fund takes on. This normally makes passive funds cheaper to invest in than active funds, which require the fund manager to spend time researching and analysing opportunities to invest in.
Tracker funds, such as ETFs (exchange traded funds) and index funds – essentially any fund that tracks an index such as the S&P 500 or the FTSE 100 – fall under the banner of passive funds, as does our very own Fund Twenty8, the UK's only passive EIS fund.
Are passive investment funds popular?
Traditionally, actively managed funds have been a favoured tool, with fund managers actively seeking investment opportunities for generally high-net-worth clients. However, in the fifteen years up to 31st March 2016, only 29% of actively managed funds had beaten the S&P 500 index.
CNBC and Bloomberg have both written extensively about the popularity of passive funds in the last couple of years, with figures stating that over $90bn was invested into debt ETFs alone in the last year.
What is the fee structure of a passive fund?
One of the key factors in the increasing popularity of passively managed funds has been the costs associated with actively managed funds, which require paying a healthy fee to the fund manager. In recent years, many people have started to question whether the 'wins' achieved by investment managers outweigh the costs, a concern backed up by the research quoted above, which shows that only a minority of actively managed funds beat the S&P 500 index.
By their very nature, passive funds require less effort, so are a becoming a popular vehicle for those who do not always have the time required to chase new investment opportunities.
They benefit from an ease of trade and a high level of transparency. Passive funds such as ETFs can be bought and sold at any time during the trading day, show all the underlying assets and are priced at regular intervals throughout the day.
In terms of minimising costs, it is clear that they have advantages over actively managed funds and certainly would appear an option for investors looking to track the market conditions.
What are the risks of passive funds?
The main risk of investing via a passive fund is that you might over-expose yourself to a small number of sectors or stocks. Because passive funds are skewed to automatically follow the most well-performing opportunities, their portfolios will often contain a small number of high-performing investments. Should these assets suddenly take a turn for the worse, it can quickly cause the overall investment portfolio value to plummet.
With our passive startup fund, we sought to address this issue by prioritising cross-sector diversification as well as a portfolio spread of a minimum of 28 investments.
In 2016, we launched Fund Twenty8 – the first and only passive startup fund in the UK. Fund Twenty8 invests passively in EIS opportunities and provide a totally new choice for investors. The fund’s strategy is to use its algorithm to automatically build you a diversified portfolio of at least 28 EIS-eligible early-stage investments, across a broad range of sectors, targeting a return of over 20% IRR including EIS tax relief.
By only backing companies that successfully reach their funding target on SyndicateRoom, Fund Twenty8 takes advantage of the expertise of its investor base of Venture Capitalists, business angels and sophisticated investors.
After strong interest, Fund Twenty8 – 2016 raised over £4.5m from 233 investors.
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