Direct or indirect share investing? Part 4 of MR MONEY MAKER’s guide to building a long-term savings portfolio
- There are a host of shares and potential funds for investors to choose from
- Over the past 30 years we have seen the huge growth in passive funds
Shares or Funds?
For most people building a portfolio is probably perceived as buying a selection of shares and bonds. However there is much more to it than this.
A share is just a slice of ownership of that company, and the bond you buy is in turn a slice of the larger Corporate or Government Debt issue.
However you can also buy a fund which will contain not just one slice but a selection of them, chosen by the fund manager running it.
Piece of the action: The good news is that you have a huge choice – and that is also the bad news
So you will still own the shares but just via a larger investment fund.
Now to own them directly is straightforward and you can hold them in your name or more often these days, in the name of the nominee company of the broker or adviser you are using.
The same will apply to a fund, so what is the difference between them?
With a fund you will usually have a fund manager choosing which shares you own and running a portfolio of holdings which anyone can buy without having to go to the bother of choosing each one yourself.
In theory your fund manager would be on the ball and managing their fund for the benefit of all the fundholders, but you will have to pay for the pleasure of his or her ‘expertise’.
Of course you could do the same yourself, but that will take a lot more homework on your part. However there are costs for running the fund, which should be covered by the annual management charge from the fund manager.
What can I learn from this?
The question is whether this fund manager can do any better than you and at the very least cover their costs. Some do, but actually quite a lot don’t!
Yes there are some star managers who have had a great track record, from the globally celebrated Warren Buffett, who has grown his clients’ investments very effectively, through to those who have been disgraced like Neil Woodford, whose investing ego seemed to let him fly too close to the sun.
Others have been just crooks, like the aptly named Bernie Madoff, who quite literally ‘made off’ with his clients’ monies.
Most funds, though, are rather dull and have found it quite difficult to consistently outperform the markets or, more importantly, their target benchmark.
Very few have found it possible to consistently outperform, especially when their internal costs and your charges are taken into account.
And another way?
Over the past 30 years we have seen the huge growth in passive funds (as opposed to active ones).
These simply track a given index such as the FTSE 100 and thus require no actual human decision – and as a result are much cheaper.
The good news is that you have a huge choice – and that is also the bad news. Next week we will look at this in more detail.
Justin Urquhart Stewart co-founded fund manager 7IM and is chairman of investment platform Regionally