Two tribes needn’t go to war on passive/active investment styles
By Dave Chessell - June 7, 2021
There was an excellent Money Marketing article by Alistair Cunningham from Wingate Financial Planning recently that called for active/passive investment tribalism to stop.
Alistair highlighted what I regularly witness: advisers who are doggedly avoiding actively managed funds in favour of index tracking, passive alternatives. They see little value in the actively managed side, believing that performance can be just as good using the cheaper passive option.
Aside from the fact, there is an irony to this stance – indexes are, after all, a by-product of investors actively choosing stocks and shares; if everybody stuck to passive trackers, there wouldn’t be any markets to track – by shunning any active funds, they may be shutting clients off from some great opportunities for performance.
No bad guys
At PortfolioMetrix, we don’t regard either style as bad: we see benefits to both. The view expressed by our UK Head of Investment, Nic Spicer in a blog he wrote in 2019, is that passive competition is good for the end investor. His stance is that access to passive routes helps to reduce the impact of the worst area of the active industry – those who purport to be active managers but are really just lazily tracking an index while charging a premium. But he equally believes there will always be a place for true active managers – those who engage in strong company research and take non-index positions that reflect that research. In effect, he believes there is a place for the active managers whose considered insights improve the efficiency of markets and thus allow passive trackers to exist in the first place.
Our portfolios use a blend of active managed funds with support from passives where we can’t build sufficient conviction. At the heart of our fund selection process is research. Using a mix of qualitative and quantitative research is central to enabling us to filter managers into the skilled and unskilled.
ESG: a strong case for active
For advisers and clients looking for investment portfolios that have a strong sustainable focus, opting for a passive only route carries extra downsides.
Passive ESG funds rely solely on somewhat superficial third-party data, while active ESG funds can go much further. Good active managers can carry out detailed positive screening across companies of all sizes, providing them with in-depth knowledge about how individual companies are impacting people and the planet.
Pure passive funds must hold all index constituents regardless of how they respond to engagement, while investors who actively scrutinise the ESG credentials of companies are able to have a positive impact on how those companies run their businesses. Those that don’t measure up can, in extremis, be sold from the portfolio.
So, as Alistair highlights in his article, rather than falling into one tribe or another, perhaps the best option for investors is to opt for portfolios that utilise the best of both routes.
If you’d like more information about how PortfolioMetrix provides advisers with the option to blend active and passive, please get in touch.