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When is a passive fund not a passive?

09 February 2024

Monthly factsheet fund disclosure is wildly inconsistent – it needs sorting.

By Jonathan Jones,

Editor, Trustnet

It sounds like the start to a joke. When is a passive fund not a passive? When it’s a [insert punchline here]. But this is something I had to consider this week when writing about the cheapest active funds.

Many of the cheapest funds in the Investment Association (IA) universe are index trackers. Put simply, they buy the majority (or all) of the stocks within an index and try to replicate the returns of the benchmark.

Active funds tend to be more expensive. My loose definition is that they are run by managers who select stocks based on their own convictions and research.

Then there is the middle ground – or ‘passive plus’. These are funds that use a benchmark and then tilt portfolios around different styles or buckets of stocks.

They are technically active – as they have a dynamic tactical allocation – but they are not stockpickers.

I excluded these from my research, given my basic definition of active funds, but they were much harder to spot than one might imagine. For one thing, not all funds include the number of holdings in the portfolio in their monthly factsheet and not all explain whether they are actively managed, passively managed with a tilt, or a full blown passive.

Of course, it is possible that a team can have conviction in hundreds of names, particularly if investing in a broad area such as emerging markets or with a global remit.

But it is confusing, particularly when there are funds with hundreds stocks that claim to be active as they make small tactical tweaks at the margin.

I have said it before but it bears repeating: fund disclosure is wildly inconsistent. Basic aspects you would expect to see on factsheets are often missing.

I’ve already highlighted  that some give the full number of holdings while others do not, but this is by no means the only difference.

When it comes to the top holdings, some opt to list the top 10 (although not all give the weightings) while others choose a different path, including things such as top five overweights and underweights relative to the benchmark or even omitting this list entirely.

There are other discrepancies too. Some provide the ongoing charges figure, while others prefer the annual management charge (and some leave fees off altogether).

Yes most of this information is available on the key investor information document (KIID) or in the semi-annual/annual report, but these can be significantly out of date.

The industry needs to step up and make investing easier for everyone. This includes making basic information available each month. It shouldn’t be that hard to achieve, they just need a push.

Consumer safety is a top priority for the Financial Conduct Authority. A lot of attention is on cryptocurrencies, greenwashing and other such areas.

But ensuring investors know what they are buying and are getting the most relevant and timely information for what are supposed to be the ‘safe’ investments is surely something to prioritise?

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