Why active management won’t protect you from downside risk

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It is dangerous to make assumptions about active fund management. Myths are extremely commonplace, particularly when it comes to downside protection. Steep cliffs apply to active fund management too, spectacularly so in some cases.

OK, so fund pickers may get lucky and guess when the next market correction will hit. But they have to position their portfolio’s accordingly, at the right time, and then get lucky again by holding the specific funds that actually do offer downside protection.

It is a realistic possibility that only a small handful of active funds will actually outperform market-cap weighted indices, and therefore it becomes practically impossible to get the process right.

During the bear market period 9 October 2007 to 9 March 2009, active funds or trusts did no better than passive funds.

In fact investment trusts underperformed their unit trust peers.

Market corrections happen, and happen regularly. It is best accept that there is no magic formula.

We believe it is better to hold a globally diversified portfolio of stocks and bonds. If you have to tinker, tinker around the edges so as not to compound the pain, and risk falling off that cliff.

Rob Wood is a financial adviser at Wychwood Financial Services