The ISA Adviser

There are a large number of different investment strategies employed by investment fund managers but essentially there are two investment fund management styles, Passive or Active.

Passive Fund Management

When a passive management style is employed for an ISA or any other type of investment fund the fund is managed in accordance with a strict set of rules laid down at inception. The fund makes no attempt to time the markets or catch on to the "next big thing" rather the fund simply follows its course regardless of prevailing market conditions.

Usually the aim of the fund is to track an index such as the FTSE 100, the rules of the fund therefore specify that a specific sampling of share representative of the index that the fund wishes to track is held and thus as the tracked index rises and falls so does the value of the fund.

The major advantage of a passive managed fund is that because the strategy is very strict the buying and selling of the underlying assets can to a great extent be controlled automatically by computers, meaning that the fund charges for investing in a passive fund can be very low.

The major disadvantage to investors in a passive fund comes when the markets fall, a passive fund's management will make no attempt to protect the value of investors funds, as the aim is just to follow the index.

Due to the low cost of passive funds many advisers and investor like to use them for the bulk of the investment in an ISA portfolio, in the belief that markets rise in the long term and holding a cheap fund will be good for the clients growth prospects. My own feeling on the matter is that this is a fine strategy for very long term investing such as a pension plan that is likely to run over more than one market cycle and benefit from long term trends, but for those using their ISA for more medium term goals it should be given serious consideration as to whether the fund is likely to be invested for a full market cycle. For example if you were using your ISA allowances for a 5-7 year investing strategy to put together a deposit for your first home then I would feel a passive strategy was not necessarily a default position.

Active Fund Management

Active fund management is the very opposite of passive management. The fund manager of an active fund has an aim or target set out for him by the fund rules usually it is to bring in a return that either beats a named index or to provide a minimum set return above a certain benchmark.

Active managed funds are all about timing the markets, catching on to "the next big thing", analysing economic trends and making money for the investors in the fund, because of this the fund is dependent on the skill of the fund managers and thus the funds are often significantly more expensive than passive funds.

Active managed funds are often used in long term portfolios alongside passive funds to take advantage of niche or high growth specialist markets where a passive managed strategy is unlikely to work due to the lack of a relevant index to track. Picking the right active managed fund is an art in itself as the difference between the top performing and bottom performing active fund in a sector can be vast.

To what extent active funds should be used in your ISA portfolio like most things comes down to a mix of your own personal circumstances and beliefs.

When working out the right mix of funds for my clients ISA investments it always comes down to their own aims and ultimate intention for their ISA funds