For David Crozier, partner at Navigator Financial Planning, passive funds were a ‘whole new ball game’ when he discovered them in 2004.
‘I became aware of the growing evidence that actively managed funds don’t pay clients back for the risk they’re taking,’ said Crozier. ‘Now we can explain to clients “here’s what you signed up for” and thoroughly explain the risks, which active managers can’t do.’
Crozier highlighted the facets of easier fund selection, time saving and accurately replicating the asset class as benefits of passive investing.
‘Fund selection is easier because you’re not looking at performance,’ he said. ‘With active managed funds I have to try and guess who will be best during a certain period of time. With passive funds all I can do now is think about which fund accurately replicates the performance of the asset class and how much it will cost. End of discussion.’
Crozier uses the L&G All Stocks Index Linked Gilt Index fund as his lowest risk product, but is thinking of changing.
‘L&G is cheap – there are very few [providers] that offer an index-linked fund,’ he said. ‘But they’re out of the loop a bit and are under review as to whether they should be in the portfolio at all.’
For the moment, Crozier is keeping the L&G All Stocks Index Linked Gilt Index on the table.
He also uses the Vanguard FTSE UK Equity Index fund, which has a total expense ratio (TER) of only 0.15%.
‘It’s very, very cheap,’ said Crozier. ‘With Vanguard, what you see is what you get. Vanguard has had a huge history in the US for 40 years. We were waiting a long time for them to come to the UK.’
Small cap variation
Crozier also invests in the Dimensional Fund Advisors (DFA) Global Targeted Value, a capital market-weighted fund that does not track an index. He said there was a risk premium to be captured when investing in small cap value companies.
‘Small companies are cheap because people don’t like them, but that doesn’t mean they’re all going to fail,’ he said. ‘At the races, if you always bet on the favourite, you might win more often, but you won’t win very much.’
Crozier’s one criticism is that the DFA fund, which has a TER of 0.63%, is a bit more expensive than the ‘outright traditional tracker fund’.
‘They’re trying to provide beta in a more imaginative way,’ he said. ‘It may be more expensive than Vanguard but they’re doing something different – they’re not rules-driven or tactical, saying they prefer Coca-Cola to Shell, for instance.’
Summing up his approach to passive investment, Crozier said: ‘I like the phrase smart beta – that works for me.’