Investing in Europe – Airbnb vs Contiki (Active vs Passive)

By Chris Gibson - December 5, 2017

Europe, a land of glitz and glamour set against the sparkling Mediterranean Sea in the summer and the chalets of the Alps come winter. In between you will find countless world famous sites melded into centuries of history and intrigue.

Read: The full Investment Month in Review December 2017 Newsletter

As a tourist there are multiple ways to access the Continent. When planning your journey you can focus on developing a high-end bespoke experience that will provide you access to opportunities available to only a few. In recent years Airbnb has come to epitomise this world.

There are of course ways of getting your European experience in a cheaper, more readily-accessible way. This will take you down the path of the packaged site-seeing tick-box tour. You’ll still get the key European experiences but for a fraction of the cost of some other offerings. Contiki has been offering whirlwind European tours (and romances!) since the 1960s.

But what has that got to do with my investments?

As with travelling, investing in Europe (as with most regions) can be approached in many different ways. Each has its advantages and disadvantages. There are two overarching investing methods that are commonly known as ‘Active’ versus ‘Passive’ investing.

Active investment managers select the investments within their mandates that they believe will provide the best risk adjusted return to investors. These managers often establish filters to define a universe of potentially suitable investments and then undertake detailed research to determine which investments have the highest return potential to be included in their portfolios. All of this costs money so active managers’ fees are higher than some other investment types.

In contrast, Exchange Traded Funds (ETFs) are usually constructed to be a mirror image of a benchmark investment index. They do not take into consideration the profitability outlook or current valuation level for investments but simply include all investments in the benchmark index. The advantage is that all high performing investments will be included but equally all poor performer investments will also be included. The lack of detailed investment research makes these funds cheaper to run than a bespoke active manager.

Source: Fund manager factsheets 

The table below summarises the key differences between two investment products that both focus on Europe. The Platinum Europen Fund is a bespoke actively managed investment fund that also has the ability to adjust its currency exposure and even to short (sell shares by borrowing from someone else) companies it believes will fall in value. Alternatively, iShares Europe ETF sits at the passive end of the investment spectrum and is designed to replicate the MSCI Europe Index. Its investments are updated and rebalanced quarterly in line with changes in the benchmark index.

Each approach has merits and pitfalls. The active manager has the potential to focus their fund on investment opportunities that are seeing above average growth to help drive above benchmark returns. Of course there will be times when their investment style is out of favour and they may underperform the benchmark for extended periods.

In a way, the merits and pitfalls of the ETF are the inverse of the active manager. The ETF won’t take additional advantage of good opportunities nor will it find its investment style out of favour relative to the benchmark.

Your adviser will be able to work through these options to determine which approach is best for you.

Bon Voyage!

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