The magic number that can save you FORCES

Diluting the value of your investments is always important, while in turbulent times, when most portfolios fall, it’s an absolutely essential part of preserving your wealth.

One way to find out if you’re getting good value for money is to find a little-known number known as active share.

Investment experts use this as an indicator of how hard fund managers are working for them. Then, if they find that the fund managers don’t justify their fees, they can ditch them and go for a cheaper option. This is a tool that ordinary investors can use.

Follow the wardrobe trackers

There are two main approaches you can take when investing. You can buy an active fund, which is a set of investments selected by an expert fund manager. Or you can choose a passive fund that buys all investments in a specific index. For example, a passive fund that tracks the FTSE 100 simply buys all 100 UK companies in that index.

Active funds tend to cost more because you’re paying someone to pick your investments. The hope is that their expertise will enable them to identify the best investments and generate higher returns than the index against which they are compared.

But here investors need to be careful. Sometimes active fund managers simply build a portfolio that looks almost identical to the index they are trying to beat.

These funds are so-called closet trackers – because they pretend to be active funds, but in reality do little more than hug their benchmark.

“Given the extra fees charged by actively managed funds, there is little benefit to investing in funds that consistently look like the benchmark they are trying to beat,” says Ryan Hughes, head of investment partnerships at investment platform AJ Bell.

A new analysis by investment platform Interactive Investor has revealed that ten percent of all investment funds are “covert trackers.”

The power of the active part

Active share is a measure of how different a fund’s portfolio is compared to its benchmark. It is expressed as a percentage. So if, for example, a fund’s active share is 40 percent, 60 percent of its holdings will be the same as a passive fund that follows the same benchmark.

Jason Holland, managing director of wealth management firm Evelyn Partners, says: “Active equity is effectively the degree to which a portfolio diverges from its benchmark index.

“Therefore, a high active share indicates that the fund is taking bolder positions than the index in the hope of providing investors with better performance.”

How to choose the right number

Generally, if you pay for active fund management, you should expect a high active share. Hughes says funds with an active share of more than 80 percent should be considered “sufficiently different from the benchmark.”

He adds: “Below that, investors would probably be better off investing in a low-cost tracker fund.” Rob Morgan, investment analyst at broker Charles Stanley, believes that more than 70 percent of the active share is a “good sign.”

“There is no right or wrong number,” says Morgan. “But we would like to see a high number to demonstrate the differentiation of the active investment approach.”

James Yardley, an analyst at investment group Chelsea Financial Services, says investors should consider active equity over time.

“There may be times when good fund managers step back and reduce their active allocation to 60 per cent due to market conditions, but then they may increase their active allocation to 80 per cent in the future,” he explains.

Ask the broker for the number

Some fund managers, such as Edinburgh-based Bailey Gifford, disclose their active holdings in monthly newsletters, while others do not.

“If I were being cynical, and I am, it’s no surprise that stock firms that publish this ratio tend to have a high share of activity,” says Kyle Caldwell, managing editor of the Interactive Investor investment platform.

“Fund firms are not required to publish this ratio, so it is not available. But it should be so.”

Chelsea’s Yardley suggests asking your fund’s broker if there is an active promotion in your fund’s newsletter. There are also some quick checks you can do that should give you some idea of ​​whether a fund’s active share is low or high:

• Check Fund Performance: If a fund closely tracks the performance of its benchmark, it may be a closet tracker. If it has good years and bad years compared to the index, it probably has a high active share.
• Check the number of holdings: A concentrated fund with 20 to 40 holdings is likely to have a high active share. A fund with more than 150 holdings is often a red flag for a closet tracker, Yardley says.
• Look at the top ten holdings: If the list of the top ten stocks held in the fund is simply a list of familiar stocks, the active share is likely to be low.

Save on fees with cheaper trackers

If you discover that some of the funds you own have low activity rates, swapping them for cheaper tracking funds can save you serious money while giving you similar investment results.

Hughes says investors can expect to pay around 0.85 percent a year for most locker trackers. Hughes says replacing them with cheap passive funds, which charge just 0.07 per cent a year, such as the iShares FTSE 100 tracker, will save around £150 annually. This is based on an investment of £20,000.

Hughes adds: “These savings are significant and will have a significant long-term impact on investor wealth.”

Selection of inexpensive means by experts

There are some cheap trackers that can be used to replace the trackers in the closet. As well as the iShares FTSE100 tracker, Hughes offers the Fidelity Index World fund, which has fixed costs of 0.12 per cent a year and gives access to the world’s biggest companies. Last year, it fell by 2.9 percent, but in three years it increased by 34 percent.

A word of warning

It is important to remember that although active share is a useful measure, it should not be used to estimate the value of a fund on its own. Nor should you assume that a high active share automatically equals an investment.

“It’s one of the ingredients in the mix,” says Charles Stanley analyst Morgan. “Active access doesn’t do anything good or bad. It’s just something to take into account when evaluating an investment fund.”

“A high active share doesn’t mean a mutual fund will do better,” agrees Ryan Hughes. “All that tells you is that performance is likely to be different from the index it’s trying to beat. It could be better, but it could be worse.”