Category Investments

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17 April 2019 Jonathan Faurie

Active vs passive management has been the David vs Goliath struggle of the modern age.

Yet, while there was a result in the latter matchup, the debate between active vs passive management has been continuing without a clear winner coming to the fore. 

At the recently held 2019 Investment Forum, it was pointed out that a case can be made for both methods of management. 

No fuss investing

Gareth Stobie, MD Coreshares, pointed out that a strong case can be made for a no frills, no fuss investment approach. 

“The world faces significant uncertainty and unpacking this uncertainty is risky. Nobody knows how the market is going to perform in the future. Nobody can put their head on the block to make a prediction regarding political risk. All that fund managers can do is to control what is predictable. This is where the value of passive management comes to the fore,” said Stobie. 

Go back to basics

In order to control what is predictable in the market, fund managers need to go back to basics and participate in simple investing. 

“To do this, fund managers need to answer three basic questions. Have I got the right asset allocation to address my client’s risk? Have I correctly structured an income stream for a client that is on the brink of retirement? Have I got the right tax wrapper in place for my clients?” said Stobie. 

Fund managers need to approach the problem of answering these questions in a systematic manner; this is where the value of passive management comes to the fore. 

“Financial advisers need to drive this. They need to sit down with clients and point out to them that passive management approaches investments in a goal orientated manner. However, the main way in which advisers can show their worth to clients is to minimise the noise that the market is providing them. Clients have more access to news regarding financial markets and they are desperate to have this noise reduced or explained in a basic manner. This is where the value of the adviser can be proven,” said Stobie. 

Careful consideration

Just because passive management is popular at the moment, does not mean that active fund management should be completely disregarded. 

“Active fund management is alive and well,” said Sherry Rexroad, MD and Senior Product Strategist at Black Rock. “Active fund management is particularly valuable for clients who want to invest in real estate. It provides clients with access to a global market and the industry is strictly governed. Therefore, transparency is built into the market,” said Rexroad. 

She pointed out that in the short-term, there are many instances where real estate investing differs from the market. This is where there are many opportunities for active fund managers to pounce at the opportunity to find alpha for their clients. 

“In most cases, active fund managers struggle to beat the market. This is not the case in the real estate space. It is estimated that 53% of active fund managers in the real estate space beat the market. This is because they understand the industry and the dynamics that drive it. In some cases, active managers can deliver returns of up to 130 to 150 basis points. If you are not participating in active management, you are leaving money on the table,” said Rexroad. 

ESG battleground

The debate between active vs passive is very pronounced in the area of environmental, social and governance (ESG) investing. 

“ESG investing has risk like any other investments. Alpha can be found when a fund manager can identify these risks and manage them. Data when it comes to governance risk is very well documented, a lot of work still needs to be done to identify the risks associated with environmental and social investing. This is possibly where active management falls short,” said Rexroad. 

“Stewardship is becoming a major talking point in the investment industry; this is what will differentiate one fund from another in the future. Passive management is a major player in this market because the whole point of passive management is that it makes sure a company shows good stewardship,” said Stobie. 

Editor’s Thoughts:
This debate is predicated on your client’s investment goals and the risks that they are willing to take on the journey to this destination. The answers are not simple to find. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts

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