So what is Active and Passive Management?
An actively managed investment portfolio is when a fund manager selects stocks or companies which they believe will deliver returns higher than the markets they are already investing in (the index). Passive managers generally aim to mirror image the return of the market itself, e.g. the ASX 300, by investing into all stocks in the market proportionally according to their size.
In contrast, active managers are more selective as to what sectors of the market they invest.
The premise of this near 50 year debate is that investing in the index over the long term with lower fees, will over time provide better after fees returns than actively managed funds as a whole with less risk. Thanks to S&P Global, since 2002 they have been tracking this, initially for the S&P Dow Jones index, but now across many other countries including Australia, Canada, Europe, India, Japan, Latin America and South Africa.
The research in itself can be debated given the basis on how the comparisons are made, however, it is clear that at different points in time, and over different markets, both Index and Active managers have their day.
It is true: if you included all managers in the pool of funds, the success average in getting better than index, returns reduces dramatically. However, history has shown that good fund managers (1st and 2nd quartile) do have the ability to consistently outperform.
To further complicate this debate, the larger company indexes (large cap) for International and Australian shares, and to a lesser extent property, behave differently to emerging country markets, Australian smaller companies, and the alternative sector.
So, how has Boutique distilled all of this information to work out what is best for our clients given the often conflicting information in the market place?
- Boutique Advisers through an evidence based approach and independent research utilise a mix of index and active managers in our recommended portfolios. Not every portfolio is the same, because every client’s risk tolerance is different. However, the base premise remains unchanged.
- At Boutique, we believe active and passive management work hand in hand at different parts of the cycle. We believe that large cap shares in markets such as International shares and Australian shares should have both index and active exposure that, will at times be tilted as we go through market cycles. Conversely, the smaller more active markets such as emerging countries and smaller companies, should have active management only.
- We believe that the large-cap managers do benefit from some index stability blending to assist with risk, with the good quality bespoke large-cap managers with good long term track records of outperformance, contributing favorably to the bottom-line return.
- We also believe that the comparatively smaller and higher risk markets are not suited to index managers as the investment universe is too small. The good stocks need to be selected to outperform. This is where small and microcap managers in Australia in recent months have had higher than average returns.
- Bonds and defensive assets need to be actively managed in this environment. The worldwide impact of lower interest rates where margins are lower has meant bond selection has become critical.
Whilst saying all of this and understanding the importance of your money at work, irrespective of the style, the overarching success of investing is measured in a methodical long term approach to generate wealth.
Finally, “Time in the market” is more important than trying to “time the market”
Gary Hasler is the Managing Director of Boutique Advisers and works with highly successful individuals and families, providing strategic financial advice. Gary specialises in working with generational family businesses, executives and family office clients as well as high level professional athletes. Gary is passionate about working with Boutique clients in a collaborative way, providing clarity and confidence, and helping them navigate their financial life.