In this eye-opening episode I provide an insider's perspective on active funds.

Discover how these funds function and learn the real differences between active and passive management.

I reveal the clever marketing tactics used by active fund managers and break down all the hidden fees that might be eating into your investment returns.

Using real-life examples and shocking data, I illustrate why active funds often underperform passive funds, and why understanding these dynamics is crucial for your financial future.

Learn the truth and get the tools to make informed decisions about your retirement funds, IFAs, and more.

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IMPORTANT: Your Capital is at Risk. Investments may not be covered by the FSCS. This is NOT investment advice - for information purposes only. Please seek advice from a regulated advisor before investing. The value of investments can fall as well as rise - don't rely on past performance.

Welcome to the Invest Like a Pro podcast, teaching you diversified

investing with a simple set and forget approach to stocks and options.

Build inflation beating wealth for your future and recurring income for today.

And now your host, former J.

P.

Morgan investment manager, Manish Kataria.

Hello and welcome back to this episode on why even bother with active funds.

I'm going to be showing you An insider's perspective into how active funds

work, why is this even important?

Now, you might not realize, but if you have a work pension scheme or an

IFA managed fund, it's very likely that you might have some active funds,

sitting in your overall scheme, and you may or may not even, realize that.

Okay, you might have even actually consciously invested in an active fund.

So this will be very important for you.

What are active funds?

What is the difference between active and passive funds?

How active management works?

How a fund manager runs the fund on a day to day basis?

How active funds are marketed very cleverly, including lots of clever tricks,

which I'm going to share with you today.

I'll talk about fees.

Clearly, you pay higher fees with active funds.

is it worth it?

We'll examine the performance differences between active and passive funds.

why does all of this even matter?

it matters because it impacts the fees we are paying.

It impacts the fees we're paying to our pension provider.

It impacts the fees we're paying to our IFA or wealth manager.

And it's a lot higher than you might imagine.

So here's one example.

I have a client, somebody who I have been helping, her name's Karen and

she came and brought her portfolio.

Along, for me to have a look at.

Okay.

And she had no idea to the extent of the fees that she was paying.

So I had a look at it, ran the numbers, and it was, astonishing.

Really, so astonishing to her, especially.

So she had, she had a decent sized, fund that her IFA was managing for her.

And when we looked at it, her investments.

had actually made 617, 000 in gains.

And you'd think that's great, which it is, right?

Because that's the power of investment markets and the stock markets.

But actually, when we took a closer look, of the 617, 000, She only got to

keep 398, 000, and the balance, 219, 000, was taken up in fees, in the active

funds, That her funds, that her capital had been invested in, in the, if a's

fees that her capital had incurred.

Okay.

So the basic sort of point of what I'm trying to say here is be very mindful of

the fees, the impact of fees in terms of active funds, in terms of any advisory

fees you're paying in terms of the pension plan, fees that are being paid.

the message is fund your retirement, not somebody else's.

Okay.

And, and this is just one example I've seen, a lot worse than this.

Okay.

And, over a period of years, the small, Difference in fees really

amounts to, potentially hundreds of thousands of pounds because fees,

the impact of fees in itself will compound negatively on your wealth.

so what even is an active fund?

Now, let's get the jargon out of the way with right, because the financial

industry is very clever and very good at throwing jargon our way.

OK, so let me just simplify things.

A passive fund.

is the same as a tracker fund, is the same as an index tracker fund, and most

ETFs are just tracking an index, okay?

What is an index?

An index is just something like the FTSE 100.

It's an index.

It's an index of the largest 100 shares in the UK

we have similar indices in the US.

in Europe, in Japan, as a global index, okay?

So it's just a track, an indicator of how shares are doing, okay?

So that's what an index is.

Now a passive fund, or an index tracking fund, just seeks to

match, What the index is doing.

It's just matching it.

Okay, nothing else just matching it And that's a good thing because all

of these indices historically have generated very good returns Historically

on average 8 to 12 percent per annum going back, you know for decades,

centuries So it's a very It's a proven Historically, capable, compounding

machine, inflation beating machine.

So that's a good thing to match it.

But actually, active funds, they try to beat the index, because

they try to do something different, and, they have to justify their

existence and their high fees, right?

So they're always looking to beat the index.

The problem with that is, more often than not, they end up underperforming,

they end up, underperforming the index.

and doing worse than what a tracker fund would do.

Okay.

That's the problem.

And I'm going to show in this episode, we're going to show some data and

some information to prove how much of a problem that is by how much they

tend to consistently underperform.

Okay.

So that's the difference.

how do we know if something is an active fund?

it's all in the fact sheet.

Every fund out there has a fact sheet.

you can obtain The fact sheet for any fund you're looking at from the

website of your fund provider or from your pension plan, or ask your

IFA if they're holding this fund.

so your fact sheet is your friend.

It contains a lot of information.

It's often one or two pages long.

it's often a PDF.

Now how do they do it?

How do they seek to beat the index?

if you think about the FTSE 100 index, 100 names, okay, and the top

10 names, typically AstraZeneca, Shell, HSBC, Unilever, BP, etc.

All the names that you would recognize.

It changes from time to time.

Okay.

and their weights change as well.

They're not evenly weighted.

So the top 100 stocks have their own weightings.

AstraZeneca is the biggest at the moment at 9%.

Shell, HSBC, Unilever, BP, they all have significant weightings.

Okay.

So these are the market determined weightings.

an index fund essentially is run by computers, because there's

no real skill involved, right?

it's just a replication process.

The index fund or the ETF looks to see what the top, 100 stocks are, looks

to see what the weightings are, and it just replicates it in an index.

Okay, so it's essentially the day to day running of an index fund is done

by computers, by supercomputers, okay?

And Vanguard, iShares, Legal General, they're all big providers of index

funds, so this is what they do.

Now, an active fund, on the other hand, They use human beings, right?

and so they typically have very expensive fund managers sitting in

very swanky offices, to manage these funds on a day by day basis, okay?

And how do they do it?

they look to see what the index fund looks like.

That's their starting point.

They see what the top 100 is and they look at the weights and

they deviate from those weights.

Okay, so AstraZeneca is the biggest name in the index at the moment.

A fund manager may look at that and say, actually, I'm not sure if I want 9.

1 percent of the fund in AstraZeneca because I don't fundamentally like it.

AstraZeneca.

So they might have a lower weighting.

Okay.

And they might decide actually Shell has an weighting.

I don't like Shell at all.

I don't like the oil sector.

So I'm going to have a zero weighting in this.

So an active fund manager will deviate from the actual

weights and the actual names.

Okay.

And you, so you get the picture.

And typically, the FTSE 100 contains a hundred stocks.

That's what the index fund has to replicate, but an active fund may

decide to only have 50 or 60 stocks.

So that's how they earn a living.

The active fund managers make active decisions on what to include

and by how much to include it.

On a day by day basis, they're analysing these companies.

They're evaluating these companies to see which ones they like

and which ones they don't like.

And that's essentially How an active fund is run.

And it's not just them.

They have teams of analysts sitting with them.

They have teams of external analysts, with other banks who advise them on

how to run these funds and what the, analysts think of individual stocks.

And they collectively make, they collectively take this

information from other banks.

All of these sources and they come to a decision.

Okay, so that's how an active fund is run on a day to day basis.

Now there are different types of active funds.

Okay, the one i've just described is typical And but there are

also some types of index funds which are essentially cheating.

Okay, so they're called index huggers and they're not very well

liked by the investment industry.

Why are they called index huggers?

Because they claim to be active but they make very small changes.

So instead of AstraZeneca being a 9.

1%, they might decide 9.

2%.

actively to decide to have AstraZeneca at 9.

0%.

Okay, and so on.

So they are, they're making very small changes to the index weightings, but

essentially replicating an index.

So they call themselves active funds because they can then

charge a premium fee, but they're not doing that much different.

Essentially, in a nutshell, they're looking to do something

different to a passive index.

and they charge higher fees for doing that.

Now, all of these active funds have very strong marketing machines, and

you've probably seen all the messages, at train stations, on the side of

the road, on the TV, in newspapers, magazines, on social media, and the

marketing appeals to all of us, right?

Because they know, The buttons to press, right?

So you see all sorts of messages.

The profit hunter, focused on performance and unrivaled teamwork.

And they might even have some data to back up their claims.

So they are a very well organized, slick marketing operation.

And they have to be, right?

Because these fund management companies are very lucrative.

They make lots of money.

They make lots of profits.

And, and that they, the marketing is if anything, even more important

than the investment function.

When I used to be a full time fund manager, we had to do what the

marketing guys told us, right?

this was the most important function in the whole bank.

the marketing ruled because that was what brought in, the money.

That's what brought in the pounds and the dollars.

but the marketing doesn't just appeal to, All of us, as retail investors, it

appeals to IFAs, it appeals to pension funds, people who are managing money on

our behalf, and this is why I mentioned earlier, you may or may not realize,

but actually, these active funds are indirectly, might be indirectly managing

your money through your pension funds, through your IFA managed funds, etc.

So have a look out for that.

Now, one of the marketing tricks that the active fund managers use

is something called fund farming.

There are lots of tricks out there, but I'm showing you one of these tricks.

Now, fund farming is a bit of a dirty trick, okay?

And it's essentially a laboratory.

Of growing funds.

so if you were to go online, say you liked a particular active fund manager,

you liked their funds, they had a good brand name, you look to see what kind of

funds they offer, they might only, you might only see 10 or 15 or 20 of their

funds actually behind closed doors.

These companies are growing, farming, maybe, hundred or

hundreds of different funds.

And the point of doing that.

is very clever.

So what they do is they grow all of these funds and they know that there

is a decent possibility that 10 or 20 of those A hundred funds will do

really well by luck if nothing else.

Okay.

So they grow these funds and the ones that happen to do really well amongst the a

hundred, let's say there's a 10% hit rate.

The 10% that do well, they market the hell out of these funds.

They show the track record, they show how well it's done,

and they're very selective.

They only show the ones that are doing well.

And so when we see the marketing messages and the numbers and the track

records, we have to be very careful.

Be conscious that they're showing you what they're showing you, but they're not

showing you what they're not showing you.

okay.

And that's, sometimes a result of fund farming.

So be very careful.

Track records, are there.

But it doesn't tell us the whole picture.

And sometimes what happens is that, the track record pulls in the pounds,

pulls in the assets under management.

And typically these funds, which have done well, during the selected

time period, then they start tailing off, then they start underperforming.

but it's too late then because these companies have captured

all of this money and the fund management companies make money.

regardless of the performance, whether the performance is good or bad, they're going

to take their percentage in fees anyway.

Okay, so they're a winner whatever happens, so be very careful.

and we talk about fees, let's talk about, hidden fees, and let's talk

about the extent of all the fees.

so just to a recap on fees, passive funds, or index tracking funds,

they typically charge, call it 0.

25%.

Okay.

that's their fee of whatever you invest.

They charge 0.

25 percent as the management fee.

An active fund typically charges multiples of this.

So anywhere between 0.

5 percent to 2%, sometimes a lot higher.

Okay.

That's the headline fee.

Okay, and those headline fees have to be high because they have

expensive fund managers to pay.

They have, swanky offices to pay rent for.

Okay, so they have a high cost base.

And some of these companies are listed on the stock exchange,

so they have shareholders.

Okay.

In fact, investors are bottom of the pile.

as I learned working in the industry, the number one priority is shareholders.

Number two priority is themselves because they have bonuses to pay to their staff.

And number three, as an almost like an afterthought.

is the welfare of the investors like you and I, okay?

you have, I fees, high headline fees, sometimes called T E R, total

expense ratio, sometimes called O C F, which is ongoing charges figure.

They largely mean the same thing.

These are the headline fees that they have to disclose, right?

In addition to the high headline fees, which are ongoing annual

management fees, there are also initial fees with some funds, okay?

So be careful of those.

There are sometimes exit fees.

Be careful of those, okay?

And sometimes these fund managers are trading in and out of individual names.

You remember earlier that there was the, their fund consisted of 40, 50,

60, if not more, names, companies, shares that they are, holding.

And sometimes they trade them around with high frequency.

That incurs costs and that is not shown in the headline rates.

That's an additional cost which is borne by the fund.

Okay, so these are, it's almost like a hidden fee.

There are all sorts of other layers of fees.

So there's research fees that sometimes when I was doing this

day in day out, I would buy in research from other companies, right?

Guess who pays for that?

The ultimate investor.

I often got taken out to, to the FA cup final to Wimbledon, things

like that, so that, and guess who pays for all of that stuff.

and then there are trips.

So I used to cover the Japanese market, so I would, frequently

go out to Japan and Asia to do my research, to visit companies.

And of course they wouldn't fly me on economy.

So there are all sorts of costs.

that are born by the fund, and ultimately who's paying for that is the

investor who buys into active funds.

Okay, so be careful about all of these fees.

there are lots of, the fees themselves are very high.

But there are lots of layers of hidden fees also.

Now all of that wouldn't really matter that much if the returns

were good and the returns were there to show for all of this, okay?

You wouldn't mind paying higher fees.

You wouldn't even mind the marketing, okay?

You don't mind the expensive fund managers and the swanky If

you're getting good returns, it, the rest doesn't really matter.

So is that the case?

Sadly not.

So there is lots of evidence out there.

I'm going to show you two pieces of evidence.

So one is, it's on the internet.

It's called spot the dog.

It's an annual publication by a platform called best invest.

So you can just Google that.

And it's called spot the dog.

They refresh it every year.

And you can see, on there, the top 10 underperforming funds by a huge margin,

all the household names will be on there.

Bailey, etc.

and it changes from time to time, but all the big household names which are

advertising heavily, which are very clever marketing, which had done well

previously, are not doing so well.

Okay, so have a look at that.

But an even better, survey, piece of evidence is something

called the SPIVA index.

S P I V A, the SPIVA index collects information from a wider range

of funds across the world, across different time periods, okay?

So just one very quick example, in the U.

S., and it's the same replicated across the world, in Europe, in the U.

K., in Asia, in the U.

S., it's 88%.

Of fund managers underperform the index.

Okay, so these are active funds, underperforming passive funds.

Again, it begs the question, why on earth would somebody invest in active funds

and pay a higher fee for the privilege?

So all the evidence is pretty overwhelming, okay?

There is no question that active funds consistently and

significantly underperform the index.

And just to give you a few high profile names, names that

you will be familiar with.

So Fundsmith is, I actually respect Fundsmith.

Terry Smith is the fund manager.

he's had a very good long term performance, just to

highlight that nobody's immune.

just because somebody has a good reputation, just because they go

through a period of outperformance, it doesn't make them immune.

from having a long period of underperformance.

So Fundsmith, has been underperforming, a comparable passive index.

for

three years, if

not

longer.

And that underperformance amounts to 15, 20%.

okay, so that's one.

is Fundsmith another one Very high profile name.

Scottish

Mortgage.

Now, if

you're not

familiar with Scottish

mortgage, it's an investment trust.

It's another variation of an

active

fund.

And, nothing to do with Scotland, nothing to do with mortgages.

It's actually a sort of type of, disruptive technology fund.

They like high growth, disruptive technology names.

Okay.

And, this was a market darling.

Everybody loved Scottish Mortgage around the sort of COVID period, just post COVID.

And it did incredibly well, during that time, when there was a big rush to online.

they captured that really well.

Unfortunately, since then, it's been a huge underperformer, okay?

and again, over the last two, three years.

It's been a massive underperformer just at the time when it attracted so many assets.

and that underperformance has continued, had persisted.

and in, in a lot of the last two or three years, that underperformance has widened.

So again, be careful of these high profile names, which have a good reputation

with, which the IFAs and the magazines we'll be talking about at the time.

it's our job to be aware that, our performance.

cannot ever continue for most of these active fund managers.

And finally, the biggest disaster of them all.

This is the poster child of active fund manager failures.

And it's the Woodford fund.

Now, some of you might be, familiar, might remember, the high profile

fund manager called Neil Woodford.

Now, Neil Woodford did really well for a period of time at

Invesco, his previous, employer.

So he did really well and he decided to capitalize on that and set up And

he got the support of every single platform, IFA, wealth management firm,

seemingly all the newspapers, the magazines were just salivating about

Neil Woodford and, and he, the fund did amazingly well at capturing interest,

capturing our pounds and dollars.

and sadly it just was a complete and utter failure.

Disaster so much so that there's a lot of people who've lost

almost all of their money now.

Okay, the funders has collapsed.

It's gone into administration.

And, and this is such a poster child because it was so heavily marketed by,

all sorts of IFAs, who should have known better, all sorts of investment platforms,

all sorts of kind of fund management, investment specialist, publications

and magazines, et cetera, et cetera.

It was so heavily promoted and marketed, and it was just, it just

became a complete and utter disaster.

They were investing in things that had nothing to do with, Their

mandate, et cetera, et cetera.

it's a complete basket case.

So again, another one, another example of why to be careful of

heavily promoted active funds, which also happen to have high fees.

So in summary, please don't be influenced by brand names.

Don't get sucked in by the marketing.

Low cost is often better performance.

In fact, investing is the only industry where you don't get what you pay for.

Okay.

It's the only industry where the lower your fees, The lower the

price, the better is your outcome.

That's the only industry I know that's, that is true.

So stay passive, avoid active to best compound for your financial future.

And if you want to see more on how to invest properly, check out our

investment academy, on the website.

and for more information, watch my video here.