Thanks largely to a welcome focus on reducing costs for investors, passive investments have become a more popular recommendation for advisers and portfolio managers in recent years. A protracted period of the average active funds underperforming has exacerbated this trend. But are passives always the best option for investors, or is active management a better approach?
Passive investing offers investors low-cost access to financial markets, instant diversification and predictable, benchmark-like performance. Passive strategies tend to do well in rising markets, a good example of this was the Telecoms, Media and Technology (TMT) bubble in 1999/2000. However, just as passive strategies are forced buyers of overpriced assets during bubble scenarios, they also become forced sellers when the tide turns - they capture all of the risk all of the time.
Active managers have the flexibility to pick under-valued sectors and high dividend yielders; they can also use cash when valuations look stretched. Performance should be better during market shocks and in the immediate aftermath as investors seek to buy “value” when recoveries gain traction.
Passive funds are an ideal tool for portfolio managers to gain low-cost exposure to particular asset classes, but the best you are going to get is the index return minus the charges. Actively managed Funds will generally cost more, but this should be outweighed by the value of an experienced management team, who can outperform in both bull and bear market scenarios. A case of having your cake and eating it.
The Global Cautious and Global Balanced portfolios incorporate a blend of the Manager’s best actively-managed funds as well low-cost passive funds. The portfolios are run in such a way that the performance will be achieved within controlled volatility bands – meaning investors will always retain a suitable risk profile regardless of market conditions.
So which strategy is better – Active or Passive? At IDAD the only side we take in this debate is the side of the investor – and their interests are best served by a combination of the right investment approaches at the right time, management of costs and a clear focus on maintaining a suitable risk profile. The IDAD Portfolio Funds give advisers the comfort and security of knowing their clients will be exposed to an appropriate level of market risk and that they will benefit from the experience and expertise of the 8AM Global investment management team.
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