Index funds vs actively managed funds
If you are considering investing into an index or actively managed fund, it is easy to become overwhelmed by all the different options out there. You may be asking yourself is it best to invest into an index fund that is designed to keep pace with market returns, or are you better placed to opt for an actively managed fund that aims to beat market returns with specifically chosen investments? In part, the choice between index funds vs actively managed funds will come down to how much risk you are willing to accept for the potential of receiving a higher return.
Index funds vs actively managed funds. What are the differences?
To make a more informed decision it is a good idea to look at the three main differences between the index and actively managed funds: management style, investment strategy and costs.
Whether you are a wholesale, sophisticated, retail or SMSF investor you should look at each before deciding which option is going to most benefit the long-term goals of your investment portfolio.
Difference 1: Active vs Passive Management
One key difference between index funds and active funds is their management style.
Index Fund
Index funds are passively managed and require no active management on what stocks to buy and sell; instead, the holdings automatically track an index such as the ASX200. The performance of an index fund is not determined by a fund manager but on the price movements of the respective stocks within the index. This is sometimes referred to as a passive investment strategy.
Actively Managed Funds
With an active fund, an investment manager will oversee the fund and make all the investment decisions. They will select the individual asset types that make up the funds underlying investment pool – provided what they pick adheres to the fund’s stated charter.
Difference 2: Investment Strategy
Index Fund
The primary goal of an index fund is to mimic the underlying benchmark index (e.g. ASX200). When the underlying index fluctuates so do the returns of the index fund. This means that if the index experiences a downturn, the fund’s returns will also suffer. Additionally, because index funds are passively managed, investors have limited control over the individual assets that make up the fund’s underlying investment pool.
Actively Managed Fund
The goal of an actively managed fund is to outperform the market average return through having an investment team/analysts hand pick investments designed to boost overall fund performance. Whilst there is a risk that the managers decision may not always lead to market-beating returns, there is also a greater possibility of higher returns. The investment team behind Remara’s Private Credit Income Fund have continued to beat the market average each year since the Fund’s inception with upwards of 10% p.a returns (post fees).
Difference 3: Costs
Index Fund
Historically index funds have had the upper hand over actively managed funds when it comes to fees, which is why their popularity has grown in recent years. Low management fees (most index funds average 0.06%) are attractive to investors and provide a low barrier of entry.
Actively Managed Fund
Whilst actively managed funds tend to have higher fees (most active funds average 0.68%) it is important to note fees do fluctuate greatly between fund managers. Investors should pay close attention to the returns (post fees) before deciding on which active fund to invest in. Our Private Credit Fund offers investors a lower-than-average management fee of just 0.50% p.a. making it an attractive option for those who are looking for consistent income from risk-adjusted, market-beating returns.
Summary
| Index Funds | Actively Managed Funds | |
|---|---|---|
| Goal | Match the performance of a specific index (market benchmark) as closely as possible | To outperform the market return (benchmark) |
| Strategy | Buys all (or a reflective sample) of the bonds or stocks in the index it is replicating | The underlying strategy is set by the portfolio manager. They use research and expertise to hand select assets |
| Risk | Risk is directly aligned with the bond or stock market the fund aims to replicate | Adds the level of risk the portfolio manager deems necessary to beat the return of the market/s it tracks |
Performance of comparable major indexes (markets) vs Remara’s Private Credit Income Fund
| Remara Private Credit Income Fund Management Information | S&P/ASX Australian Government Bond Index Bloomberg | ASX 200 Bloomberg | Australian RBA Target Cash Rate Bloomberg | 1 Month Bank Bill Swap Rate Bloomberg | AUD/USD (Cross Rate) Bloomberg | AUD/EUR (Cross Rate) Bloomberg | S&P/ASX 200 Real Estate Index Bloomberg | Australia CoreLogic – Median City Values MoM Actual Bloomberg |
|
|---|---|---|---|---|---|---|---|---|---|
| Initial Investment @ Nov 13 | $10,000 | $10,000 | $10,000 | $10,000 | $10,000 | $10,000 | $10,000 | $10,000 | $10,000 |
| Investment @ Nov 2023 | $23,885.91 | $12,309.48 | $13,212.66 | $11,727.92 | $11,826.52 | $7,204.66 | $8,974.93 | $19,943.59 | $15,723.17 |
| A$ Return | $13,885.91 | $2,309.48 | $3,212.66 | $1,727.92 | $1,826.52 | ($2,795.34) | ($1,025.07) | $9,943.59 | $5,732.17 |
| % Return | 139% | 23.09% | 32% | 17% | 18% | -28% | -10% | 99% | 57% |
| % Return (Annualised) | 9.09% | 2.10% | 2.82% | 1.61% | 1.69% | 3.22% | -1.08% | 7.14% | 4.63% |
| % Volatility | 0.12% | 1.60% | 4.06% | 0.09% | 0.09% | 2.91% | 2.31% | 5.75% | 0.88% |
| % Volatility (Annualised) | 0.43% | 5.53% | 14.08% | 0.31% | 0.33% | 10.09% | 7.99% | 19.94% | 3.05% |
Note: Full index names can be seen in the disclaimer at the end of the article.
Key Takeaways
The Remara Private Credit Income Fund [RPCIF] outperformed 8 of the major Indexes, delivering investors a AUD$ return of $13,885.91 (average annualised return of 9.09% p.a) whilst preserving all of the original $10,000 investment.
The volatility of the RPCIF’s underlying investment strategy was only 0.43% (annualised). In comparison the best performing Index (AS51RLS) recorded a gain of $9,943.59 with 19.94% [annualised] volatility. For investors this means the RPCIF delivered better and more consistent returns with less overall risk. Click here to further explore the effects of volatility on a portfolio and why it is in an investors best interests to limit.
Index funds vs actively managed funds. Which is better?
Whilst index funds have their place in an investment portfolio, investors who are looking to add diversification should consider the benefits of adding an actively managed fund into their portfolio mix.
Actively managed funds, particularly those invested in alternative assets, are not only hand-picked with risk management in mind, but typically have a lower correlation to how the public market and indexes perform. This means that in times of market volatility, their performance does not fluctuate in line with the market, adding stability and reducing overall portfolio risk.
Remara’s Private Credit Fund is designed for investors looking for attractive yields and a regular monthly income with the ability to access their money without penalty or withdrawal fees. To find out more about our leading Private Credit Fund chat with one of our team today, or explore all the features and benefits in further detail.
Important Information/Dislcaimer
The data presented in this analysis is derived from publicly available sources, including Bloomberg, S&P and Remara Management. It spans 10 years of monthly total returns for the following items:
- Remara Private Credit Income Fund (RPCIF) (Remara Management)
- The S&P/ASX Australian Government Bond Index (Bloomberg)
- The ASX 200 Index (AS51 Index) (Bloomberg)
- The Australian RBA Target Cash Rate (RBATCTR Index) (Bloomberg)
- 1 Month Bank Bill Swap Rate (BBSW1M) (Bloomberg)
- The S&P/ASX 200 Real Estate Index (AS51RLS Index) (S&P)
- AUD/USD (Cross Rate) (AUDUSD BGN Currency) (Bloomberg)
- AUD/EUR (Cross Rate) (AUDEUR BGN Currency) (Bloomberg)
- Australia CoreLogic – Median City Values MoM Actual (RPAUMED Index) (Bloomberg)
The returns presented are hypothetical and for illustrative purposes only, calculated by modelling compounded returns on a hypothetical A$10,000 investment. No transaction costs, taxation, or other fees are considered. Volatility is determined as the standard deviation of monthly returns, with annualized volatility calculated as the square root of the monthly volatility.
Past performance is not indicative of future results, and these returns should not be viewed as guarantees or predictions of future performance. Individual investment decisions should consider personal circumstances and objectives.
For comprehensive information, including actual performance, fees, and expenses, consult our official disclosure documents.
This information is provided for educational purposes and does not constitute an offer, solicitation, or recommendation for investment.. For further details or inquiries, please contact us directly.
Additional Note: RPCIF launched during August 2022. Pre-launch returns data has been assumed at floating RBA rate + 7% p.a. Hypothetical returns presented here do not represent the actual performance of RPCIF rather the Investment Returns consistent with assets available in the market. During the 10-year period, we observe from public markets that lower rated notes within public term deals with publicly disclosed margin (avg ~ B and Margin of +700). Remara’s mandate includes private warehousing which due to its less liquid nature attracts a higher margin than what is observed in public markets.
