There is a trick savvy shoppers have known for some time. To enjoy the best groceries without breaking the bank, do the bulk of your shop at a budget supermarket – and top up with a few luxuries at a premium one.
Pair Aldi basics with Waitrose treats, for example, or buy cupboard staples from Lidl and then treat yourself to meat from the local butcher.
But investors could learn a thing or two from shoppers about the art of the ‘Aldi-Waitrose’ approach. It can pay to keep costs low when there is no need to spend more – and then pay a little extra where expertise can add value.
Savvy shopper: Investors could learn a thing or two from shoppers about the art of the ‘Aldi-Waitrose’ approach
Investment funds fall broadly into two categories. So-called active funds are sometimes viewed as the premium products. You pay a bit more for them, but your money buys you the expertise of a fund manager who spends his or her days trawling through financial reports and meeting with chief executives to seek out the best companies to invest in.
They can easily cost a chunky one per cent of your investment – sometimes considerably more – but the idea is that you’re paying for quality.
The second category is cheap and cheerful passive funds. Here, there is no one trying to find the companies that could shine. Instead, algorithms are used to buy a bit of everything. For example, a UK passive fund may buy shares in every company listed on the London stock market.
A global fund may buy shares in thousands of companies listed around the world. There is no fund manager to pay for and as a result these funds can cost as little as 0.05 per cent.
Some investors prefer to keep costs down with passive funds, others are happy to pay more for a fund manager’s expertise in the hope of getting higher returns.
But many investing experts think you can adopt the ‘Aldi-Waitrose’ approach to get the best of both worlds.
‘It’s quite a common-sense approach,’ says Adrian Lowcock, a chartered wealth manager with investment fund analyst Willis Owen. ‘You can have one core, passive fund that gives you exposure to all global markets. Then you can add a few active funds if you want to increase your exposure to certain markets.’
Passive funds can be a good way to buy a little bit of everything as a starting point for a portfolio. Some global passive funds hold thousands of companies around the world at very low cost.
However, because they are so large, they are a bit of a blunt tool. If you want something more refined to give you exposure to a particular region or sector, an active fund can sometimes help.
Richard Pearson, director at EQi, believes it can make sense to pay a fund manager in markets where it is harder to spot the hidden treasures. For example, the US market is so trawled over by investors looking for winners that it’s hard to find something that is undervalued. In this case, experts are going to struggle to spot the winners and a cheap, passive fund will do just as well.
However, in emerging markets where there is less scrutiny, there may be greater opportunity to find companies that have been overlooked. Here, an expert could help add value. ASI Emerging Markets Equity is a popular active fund among EQi customers. It has returned 9.5 per cent over three years and has an ongoing charge of 1.19 per cent.
iShares UK Equity Index is a hit among customers looking for a UK passive fund. It costs just 0.06 per cent, but due to recent stock market turbulence it has fallen 3.6 per cent over three years.
Lowcock adds that technology and robotics are another case where you may want a skilled fund manager who knows the industry well to pick the winners for you.
‘In tech there are a lot of companies with great ideas. But a good, experienced fund manager will be able to filter through these to find those with good management teams to execute them,’ he says.
T. Rowe Price Global Technology Equity has a team of 22 technology analysts who conduct detailed research into companies. It has returned 89.1 per cent over three years and costs 0.96 per cent.
Meanwhile, Pictet Robotics invests in companies working in areas such as automation, 3D printing and autonomous systems. Investors pay 1.08 per cent, but have benefited from a return of 69.4 per cent over three years.
Lisa Conway-Hughes, chartered adviser and founder of financial education platform She’s On The Money, believes that in the same way you might pick a premium supermarket if you like to know the provenance of your food, you may want to pay a bit extra to a fund manager if you like to invest ethically.
‘For ethical investing, you may want to pick an active fund so that you can see exactly what you are investing in. You want to be able to make sure your fund manager has the same interpretation of ‘ethical’ as you.’
Ethical passive funds are available, but as they tend to have hundreds of holdings, they can be harder to scrutinise.
DON’T BUY TOO MANY ACTIVE FUNDS
Don’t go overboard when adding exciting funds to spice up the basic core of your investment portfolio.
Adrian Lowcock, a chartered wealth manager at Willis Owen, suggests you might start with a global tracker fund as a core holding, and then add active funds carefully as your knowledge grows over time.
‘Anything over 20 funds could be considered too many,’ he warns. ‘You can build a portfolio with ten or 15.
‘But if you buy too many active funds, you can find they are simply doing the job of a passive fund because you are over diversified.’
Chartered adviser Lisa Conway-Hughes also warns about getting carried away.
She says: ‘Some of my clients like to have an element of fun in their portfolio and section off a certain amount to try out their investing ideas.
‘However, in general they don’t tend to outperform the market – even if a hunch really pays off, it won’t have an impact on their investments overall because it’s such a small element of their portfolio.
‘If you enjoy trading that much, there are fantasy fund platforms you could consider where you do not trade with real money.’
Active funds can also add value if you want to invest in smaller companies as passive funds tend to exclude them. In general, the bigger the company the bigger the weighting it will have in a passive fund.
Lowcock explains: ‘In the UK, the biggest 250 companies make up 95 per cent of the market. If you invest in a passive UK fund, you will not have exposure to small UK companies. If you want to invest in smaller companies, you could look at active funds.’
Lowcock likes Merian UK Smaller Companies, which costs 1.03 per cent and has returned 7.4 per cent over three years.
A global passive fund can be a great starting point for new investors or those who want to make money but have little interest in following companies and stock markets. Picking one requires no hunches or expertise – you simply find one low-cost fund that holds shares in companies listed all around the world.
For example, the Vanguard Global All Cap Index gives you exposure to 6,826 holdings around the world for 0.23 per cent.
At the moment, the US is the biggest global stock market. As a result, around 63 per cent of a passive global fund is likely to be made up of US companies. The UK is the third biggest market – as a result around 4 per cent of a global passive fund will be UK companies.
Then, if you think, for example, the UK market may grow faster than others, you may want to invest in a UK fund on top to increase the proportion of UK companies in your portfolio.
Or, if you want to invest more cautiously, you may want to add a fund that invests more in bonds, which tend to be less volatile than shares.
Active funds can help you do this, but it makes sense to use them only in cases where they stand a chance of outperforming a passive fund to justify the extra expense.
With both groceries and investments, more expensive does not necessarily mean better quality. Aldi and Lidl both offer premium products and regularly win awards for the quality of their goods. Similarly, passive funds are not necessarily worse than active ones.
James Norton, senior investment planner for Vanguard UK, which offers both active and passive funds, says: ‘We believe the right starting point for investors is a globally diversified portfolio, made up of index [passive] funds. If it is globally weighted, you don’t need to make any decisions yourself at all.
‘For many investors that is all they need to do. However, if you are happy to take additional risk, adding an active element to your portfolio can be a sensible thing to do.
‘However, most active managers underperform. To succeed with active funds, you need to be able to identify talented managers, be able to access them at low cost and to have the patience to hold on to them through different markets.’