Is there an Active vs Passive debate anymore?

Is there an Active vs Passive debate anymore?

November 25, 2021 10:48 am

If there is an Active vs Passive debate, these days it centres on key issues, says Angelo Kornecki, technical director, Redmill Advance.

This is a huge topic and one that certainly divides opinion throughout the industry. All you have to do is do a quick google search for ‘active vs passive investment management’ and sit back and read the hundreds of articles, research and opinion pieces.

This short article is not to try to provide an answer, as some of the ‘brightest’ minds and think tanks in our industry haven’t been able to do that over the last decade or so, however we thought it would be good to highlight a few areas of interest and provide some thoughts.

Does this really need to be a “vs” argument/debate? Is there a place for both in a world where cost of investment management is becoming more and more prevalent in discussions and countless white papers and research are produced in support of both sides of the fence?

To begin let’s define some of the key terms, mainly; what does Active, and Passive actually mean. Over the years there has been a blurring of the two, with terms such as “actively passive”, “strategic passive” and “closet trackers” to name a few.

Traditionally the term active investment management involves a team of investment professionals and analysts pouring over reports and accounts to forecast, select and trade the “best” companies and assets with the sole purpose of creating a portfolio that outperforms a relevant benchmark, and for this, you pay more.

Whereas passive investment management is somewhat the opposite taking more of a buy and hold approach with little or no involvement of a management team trading underlying assets to outperform a benchmark. Instead, the main goal is to match the return from the benchmark, as a result, the fees are typically a lot lower than those of an active strategy.

These are of course very basic definitions and as you would expect in an industry that is constantly changing these management styles have evolved into much more than the above.

So, what is the argument (if there is one)?

Well, the two main focal points have always been on cost and performance, with passive advocates such as Vanguard (one of the first and largest passive investment managers in the world) holding a mantra that “every pound paid in fees is a pound less of potential return” – which makes perfect sense especially given the mass of research to suggest that active investment management doesn’t actually produce consistent returns over and above the benchmark over the longer term. Posing the question, what’s the point in paying higher fees when you could simply invest passively, keep more of your money and hence receive a better return.

The active counterargument is that it does work and that the higher fees are justified because selecting the right fund manager can create positive alpha (a common performance measure defined as the excess return over the benchmark return).

So, who’s right? does it really matter? And are retail investors that interested?

One thing for certain is that there has been a large shift towards cost consciousness within the retail investment space. What is telling is that over the last 5-10 years there have been some very prominent passive managers moving into the active space along with many multi-asset fund houses now offering a ‘blended’ proposition, where they attempt to combine the two styles to gain the ‘best of both worlds’; a reduction in cost and an attempt to exploit tactical ‘active’ decisions to obtain alpha.

Given the above, it is clear to see that a large number of advisers and their clients are not getting too hung up on which style is better and in fact choose to use both investment styles with some basing their decisions on goals and the objectives, with funds earmarked for longer-term needs invested in a suitably risk-rated, buy and hold strategy and funds used over the shorter term, perhaps income or liability matching, invested in a more active way.

Unfortunately, it doesn’t look like we are going to get an answer to this debate any time soon, there will always be investors, and advisers for that matter, who hold on to their beliefs and continue to invest in the style they are most comfortable with.

Rest assured cost of investment management is a discussion that isn’t going away either as more and more investors question the cost of their investments in relation to the “value” they receive.

Whatever their opinions and beliefs, from an advice firm’s perspective the most important factor in all of this is the positive outcome for the client and the value they add. As such the usual discussions around attitude to risk and capacity for loss along with diversification, asset allocation and investment goals and objectives remain crucial before worrying too much about the investment style.

Connect with Redmill
Stay up to date with the latest industry news. Connect with us on the below channels for insights, new jobs, helpful tips and more.
Latest News
  • Is there an Active vs Passive debate anymore?

    Is there an Active vs Passive debate anymore?

    If there is an Active vs Passive debate, these days it centres on key issues, says Angelo Kornecki, technical director, Redmill Advance. This is a huge topic and one that certainly divides opinion throughout the industry. All you have to do is do a quick google search for ‘active vs passive investment management’ and sit back […]

    Read more
  • Journey to Adviser – Ryan Snowball, DipPFS

    Journey to Adviser – Ryan Snowball, DipPFS

    It’s such a great feeling when you know you’ve really supported someone to achieve their goal. In this series of ‘Journey to Adviser’, Ryan Snowball, talks about his unique journey to Adviser. We are so proud of Ryan and wish him every success in life.   Ryan Snowball https://www.linkedin.com/in/ryan-snowball-dippfs-b5999b20a   About your journey  Becoming a Financial Adviser […]

    Read more
  • Summary of the planned dividend taxation and what to do about it.

    Summary of the planned dividend taxation and what to do about it.

    The repercussions of the COVID pandemic have been catastrophic. First and foremost, on the lives of the families who have sadly lost loved ones but also to many industries throughout the world, in particular the hospitality industry that is still yet to re-find its feet. As we know the UK government implemented measures and initiatives […]

    Read more