Understanding the Passive vs. Active Fund Argument for Investment Funds

Should I pay additional costs for active investment funds?

When it comes to investing, the most important decision is deciding where to invest your money, and from the numerous options available it can prove a difficult decision to make. The 2 main choices are investing actively or passively. Active investing is when a fund manager is buying and selling instruments to outperform a certain benchmark, whilst passive investing is effectively just buying all assets under a benchmark through an index fund or ETF. Below is a study that has compared the performance of active to passive funds over a 15-year period.














Source: S&P Dow Jones Indices LLC. Data as of Dec. 31, 2020

Given active funds mostly underperform, why ever choose them?

To understand why many advisers recommend active funds over passive funds, you must first understand how financial adviser firms are incentivised and trained. Often, financial advisers will have a great understanding of financial products but a below-average understanding of investment advice. Investment advice is therefore outsourced to a discretionary fund manager or active manager who rebalances the asset allocation for the client. This can often come with additional annual fees of between 1-2% in addition to the financial product and adviser charges.

Given that the above examples of active fund performance compared with passive fund performance excludes all other charges, what value are financial advisers proposing through recommending active funds? The above study clearly suggests that active funds underperform their passive equivalents around 80-90% of the time. Therefore, paying additional fees to active fund managers can be difficult to justify. As such, any portfolio recommendation that includes active funds should be thoroughly inspected and questioned.

So, what is the correct passive investment solution?

As a company, we only invest in passive investments and have a core-satellite approach whereby

A minimum of 80% of our investments, our core, remain in fully diversified passive investments and up to 20% are invested into passive funds that we feel could outperform the market.

Within our core investments, we hold every single publicly list stock on all developed and emerging stock markets worldwide and all investment corporate and government bonds worldwide. These investment funds all cost less than 0.25%, are rebalanced on a quarterly basis and are managed by either:

  • iShares (Blackrock) – The largest fund manager in the world
  • Vanguard – The second-largest fund manager in the world
  • Fidelity – The fifth-largest fund manager in the world


Our satellite part is built around thinking about the long-term trends that can change the trajectory of the global economy known as megatrends. These powerful, transformative forces — from AI to genomics to clean energy — are shifting the priorities of society, driving innovation and redefining business models. We see the strongest megatrends with the potential to completely shift how we live and work.

Final words

When making a financial decision it is imperative that you understand where your money is being invested and whether it is truly in your interest or not. At SJB Global, we pride ourselves on our 4.9/5 star rating on Trustpilot by providing our clients with the best advice possible.

This communication is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity.

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