The active/passive investment debate shows no signs of abating, with the argument for passive driven by the notion that it is efficient and low cost.
We covered the topic in a blog (Two tribes needn’t go to war on passive/active investment styles) earlier this summer, highlighting our belief that there is room for both in a portfolio.
Our colleague Liam Dawson took another look at it recently, detailing more reasons why having a polarised view on the subject does not necessarily deliver the best outcomes for investors.
In a short paper called Active and Passive: They are not mutually exclusive he references the model proposed by Grossman and Stiglitz (1980) in their paper “On the Impossibility of Informationally Efficient Markets”.
To summarise, they suggest a dynamic investment system requires the existence of both active and passive investments and they should not be seen as mutually exclusive.
These include low fee implementations where the cost of information is too high, relative to the potential reward and funds with greater active risk in regions where the reward for price discovery is greater than the cost.
Passive not without cost
While many advisers accept that a blended portfolio has merit, it’s hard to shift the belief among some investors (and advisers) that passive can deliver stellar returns at virtually no cost. For those that have that belief, reading “The Dirty Little Secret of Passive Investing” by Michael Aked will provide some interesting food for thought. It covers 1) the ‘hidden costs’ that exist with passive 2) the impact of ‘quant’ funds pushing stock prices up ahead of the stock’s inclusion in a specific index 3) the risks of certain countries or sectors dominating specific indices.
Blended makes the best of both
Being open to portfolios that draw on each style means investors are able to benefit from the best that both have to offer, in terms of performance and cost, depending on the individual markets.
If you would like to know more about the work carried out at PortfolioMetrix to blend active and passive in our portfolios, please get in touch via engage@portfoliometrix.co.uk.
