The Active vs Passive Debate: A Deep Dive into the AJ Bell “Manager vs Machine” Report
2nd August 2024
The debate between active and passive fund management has been a longstanding one, with strong opinions on both sides. As financial advisers, it's our duty to sift through the noise and make decisions that are truly in the best interest of our clients. The latest AJ Bell “Manager vs Machine” report sheds significant light on this topic, and it’s worth taking a closer look at the findings to ensure we are aligning our investment strategies with our clients' needs, rather than simply following industry norms.
Key Findings from the Report
The AJ Bell report presents a sobering reality: only 35% of active equity funds have outperformed the average passive fund in their respective sectors in 2024. This figure is consistent with the performance over the past decade, where again just 35% of active funds managed to beat their passive counterparts. These statistics are telling, and they underscore the importance of careful, strategic fund selection.
The report also highlights that the underperformance is particularly pronounced in the Global and US sectors, driven largely by the dominance of a few technology giants. For many active managers, keeping pace with these high-flying stocks has proven to be a near-impossible task. In fact, when Global and US funds are excluded from the analysis, the percentage of active funds outperforming a passive alternative rises to 46%. While this is a more respectable figure, it still falls short of what many would consider a justification for the higher fees typically associated with active management.
The AJ Bell report presents a sobering reality: only 35% of active equity funds have outperformed the average passive fund in their respective sectors in 2024. This figure is consistent with the performance over the past decade, where again just 35% of active funds managed to beat their passive counterparts. These statistics are telling, and they underscore the importance of careful, strategic fund selection.
The report also highlights that the underperformance is particularly pronounced in the Global and US sectors, driven largely by the dominance of a few technology giants. For many active managers, keeping pace with these high-flying stocks has proven to be a near-impossible task. In fact, when Global and US funds are excluded from the analysis, the percentage of active funds outperforming a passive alternative rises to 46%. While this is a more respectable figure, it still falls short of what many would consider a justification for the higher fees typically associated with active management.
The Pitfall of Industry Norms
At Brigantia, we pride ourselves on not being content with the status quo. The AJ Bell report serves as a stark reminder that the financial services industry is replete with advisers who may take the easy route, sticking to actively managed funds despite their lacklustre performance. This approach is often motivated by a desire to justify management fees, rather than by a genuine commitment to client outcomes.
This "tick-box" mentality is dangerous. It may seem safer to follow the crowd, but in reality, it does a disservice to clients. Relying on actively managed funds simply because they have traditionally been the go-to choice is not sound financial planning—especially when the data consistently shows that the majority of these funds are failing to beat passive alternatives.
Brigantia’s Commitment to Strategic Fund Selection
At Brigantia, our approach is different. We are committed to selecting the right investment solutions for our clients, whether they are active or passive funds. Our focus is on building a holistic financial plan that aligns with each client’s unique goals, risk tolerance, and financial situation.
We understand that active management can play a valuable role in certain circumstances, particularly in niche markets or sectors where skilled fund managers have the opportunity to add value. However, we also recognise that passive investments often provide a more reliable and cost-effective way to achieve market returns. This balanced approach ensures that we are not swayed by industry norms, but are instead guided by what is truly best for our clients.
At Brigantia, we pride ourselves on not being content with the status quo. The AJ Bell report serves as a stark reminder that the financial services industry is replete with advisers who may take the easy route, sticking to actively managed funds despite their lacklustre performance. This approach is often motivated by a desire to justify management fees, rather than by a genuine commitment to client outcomes.
This "tick-box" mentality is dangerous. It may seem safer to follow the crowd, but in reality, it does a disservice to clients. Relying on actively managed funds simply because they have traditionally been the go-to choice is not sound financial planning—especially when the data consistently shows that the majority of these funds are failing to beat passive alternatives.
Brigantia’s Commitment to Strategic Fund Selection
At Brigantia, our approach is different. We are committed to selecting the right investment solutions for our clients, whether they are active or passive funds. Our focus is on building a holistic financial plan that aligns with each client’s unique goals, risk tolerance, and financial situation.
We understand that active management can play a valuable role in certain circumstances, particularly in niche markets or sectors where skilled fund managers have the opportunity to add value. However, we also recognise that passive investments often provide a more reliable and cost-effective way to achieve market returns. This balanced approach ensures that we are not swayed by industry norms, but are instead guided by what is truly best for our clients.
The Importance of Sound Financial Planning
The findings of the AJ Bell report reinforce the importance of sound financial planning. It’s not enough to simply select funds that have performed well in the past or that are popular within the industry. True financial planning requires a deep understanding of market trends, a commitment to ongoing research, and a willingness to make difficult decisions when the data supports it.
For us, this means continuously monitoring the performance of both active and passive funds, and making adjustments as needed to ensure our clients are positioned for success. It also means being transparent with our clients about the reasons behind our fund selections, and helping them understand the potential risks and rewards of each option.
Conclusion: Taking the Right Path
The AJ Bell “Manager vs Machine” report is a timely reminder of the need for vigilance in our fund selection process. At Brigantia, we are committed to ensuring that our clients receive the best possible advice, rooted in data and tailored to their individual needs. We refuse to take the easy route, and instead, we focus on delivering long-term value through sound, strategic financial planning.
If you're interested in learning more about how Brigantia can help you achieve your financial goals, we invite you to book an introductory call with one of our experts. Let us show you the difference that true financial planning can make.
You can access the full report from AJ Bell here:
Manager_Machine_2024.pdf (ajbell.co.uk)
The findings of the AJ Bell report reinforce the importance of sound financial planning. It’s not enough to simply select funds that have performed well in the past or that are popular within the industry. True financial planning requires a deep understanding of market trends, a commitment to ongoing research, and a willingness to make difficult decisions when the data supports it.
For us, this means continuously monitoring the performance of both active and passive funds, and making adjustments as needed to ensure our clients are positioned for success. It also means being transparent with our clients about the reasons behind our fund selections, and helping them understand the potential risks and rewards of each option.
Conclusion: Taking the Right Path
The AJ Bell “Manager vs Machine” report is a timely reminder of the need for vigilance in our fund selection process. At Brigantia, we are committed to ensuring that our clients receive the best possible advice, rooted in data and tailored to their individual needs. We refuse to take the easy route, and instead, we focus on delivering long-term value through sound, strategic financial planning.
If you're interested in learning more about how Brigantia can help you achieve your financial goals, we invite you to book an introductory call with one of our experts. Let us show you the difference that true financial planning can make.
You can access the full report from AJ Bell here:
Manager_Machine_2024.pdf (ajbell.co.uk)