Index Investing
In this section…
Analysis
A PORTFOLIO OF ACTIVE
AND PASSIVE FUNDS
35-37
“Passive investments are not
good at tracking investments
which are not deep or liquid
such as property or hedge
funds… The main advantages
of the passive portfolio are its
low cost and greater likelihood
of better performance over
time”
THEORETICAL PORTFOLIO RETURNS 35
“Taking a look at a typical balanced strategy, in addition
to knowing the expected returns, we can also show how
probable the actual results are and how that varies over
time”
PASSIVE APPROACH 36
“Most research points out that over the long term active
portfolio managers as a whole tend to underperform
their chosen benchmarks by around 2% a year. Many
investors have become disgruntled with this level of
underperformance”
ACTIVE APPROACH 37
“Some investors prefer to have active managers in the
belief that they will outperform over time. Active managers
may also be able to access some investment classes where
passive funds have difficulty”
Getting the right blend
The debate of active versus passive investment style is
one that is unlikely to ever result in a definite winner.
Managers of client money will have a preference based
around cost, liquidity, risk/return profile of the client and
so on as each strategy suits different investment, and
therefore, client needs.
There are more who prefer to design portfolios of
passive funds only rather than active funds only, but
discounting an entire fund-type is dangerous – how
many would not include investment trusts en masse, for
example?
One argument that is not often discussed in public is
how active and passive funds can be blended together in
the same portfolio, with the portfolio managers backing
their own conviction to pick the right funds and their
managers.
■ According to figures from the IMA £459.54bn of money
was invested in active funds across all asset classes, to
the end of October ’09.
■ By comparison, according to BlackRock, European ETF
assets hit an all time high of $216.8bn at the end of
November ’09.
■ Going into Q4 ’09, 70% of ETF money was in equity
assets, while 60% of active money is in equities.
Source: Investment Management Association; BlackRock
34 PORTFOLIO ADVISER [www.portfolio-adviser.com] JANUARY 2010
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