Four Reasons In Favour Of Active Management
Alex de Wit
Personalised financial planning, affordable investment solutions and award-winning management services for expatriates.
by Infinity
Few subjects get a debate going amongst investors and wealth managers as much as the active and passive management one. In this post, we put the case for active management.
Passively managed funds are tied to a major index, such as the Dow Jones or the FTSE 100. The main principle behind passive management is that these kinds of investments mirror what the markets are doing and don’t seek to outperform. Market ups and downs are ignored in favour of a buy-and-hold investment strategy.
Active investing, on the other hand, involves a bit more tinkering. Active managers will look at market conditions, see how particular funds and fund managers are doing and make investment decisions based on that research. The goal is to outperform the markets, although this is easier said than done.
And that’s exactly why we need to employ professional investment managers – this is definitely a job best left to the professionals who have serious amounts of experience and dedicated research to base their decisions on. An amateur investor will find it difficult, if not impossible, to time the markets based on media reporting, as once the news is out, the boat will well and truly have sailed on buying or selling at the right time.
Active Management Strategies
Active managers operate on the premise that people can profit from the stock market through various strategies that intend to determine which stocks are trading for less than their value merits. Accordingly, active fund managers employ a myriad of strategies that may include a combination of quantitative, fundamental, and technical indicators to identify favourable stock prices that outperform their passive alternative. Active managers also utilise asset allocation strategies that align with the goals of the fund and the active investor.
Many fund sponsors and investment companies believe they can employ an efficient investment strategy and professional active managers and surpass the market performance to better manage the mutual funds of a company. Active fund managers see such investment strategies as a means to adjust to a volatile market and unpredictable market innovations.
Advantages Of Active Management
There are four main reasons why, when put in the hands of a competent wealth manager, actively managed funds can generate better returns than passive management. These are outlined below:
Downside protection
We agree with Tilney/Evelyn, our wealth management partner firm, that this is the best way to preserve and grow our clients’ capital over time. Owning large parts of the market is to be avoided, and Evelyn, therefore, shies away from businesses that are highly financially or economically leveraged, i.e. that have high levels of debt or are cyclical in nature and therefore more vulnerable when market conditions are tough. Evelyn limit exposure to investments in the banking, mining and energy sectors, which usually feature fairly heavily in passively managed portfolios. Indeed, this is one of the vulnerabilities of passive management. In 2018, Evelyn’s performance validated this approach.
The price must be right
It makes logical sense that active management investors should never buy assets at a higher price than their intrinsic value and that doing so could harm long-term performance. Passive investment often involves investing when prices are not right because capital is allocated according to the proportionate size of companies in an index. Investors are forced to mistime – buying when shares are overvalued and selling when they are undervalued. It is incredibly difficult even for seasoned fund managers to consistently deliver market-beating performance for long periods, but there are some that do manage it, which is why we only work with the best.
Individual company performance trumps geography
Successful investment in Evelyn means investing in exceptional global companies, irrespective of where in the world they are based, with funds managed by exceptional global managers. Selecting the right active manager is far more important than looking at the microeconomic outlook for particular regions. Timing regional equity market allocation is nigh on impossible, so Tilney ignores short-term market predictions and focuses instead on high-level asset allocation (the split between bonds, equities etc.) to manage volatility and safeguard returns.
The higher cost is worth it
One argument often used in favour of passive rather than the active investment is that the active management of funds is more expensive. This is undoubtedly true. Typical costs for an actively managed portfolio would be 0.7% compared to 0.2% for a passively managed portfolio. However, we would argue that the ability to consistently outperform benchmarks offsets this cost in the long term. This is something that Evelyn has researched extremely diligently. Have a look at these examples of active funds, which have been included in Evelyn’s portfolios for more than five years and have consistently outperformed their respective markets, even once fees are taken into consideration. Findlay Park, for example, produced a return of 14 times the original investment compared to 4% for the S&P index as a whole. Active management provides a range of alternative investments for investors to explore that are uncorrelated to the market.
Of course, we can’t stress enough that actively managed funds need to be put in the hand of competent active managers with a solid track record. That is why Infinity has forged a partnership, exclusive in Asia, with Evelyn, an award-winning discretionary fund manager who has proved that they can deliver the goods for our clients repeatedly.
If you’d like to make sure that your savings are working as hard as they possibly can for you – and who doesn’t want that? – then why not drop Alex a line and see what the Alex/Evelyn team can do for you?
FAQs
What is Portfolio Management?
Portfolio management is the science of choosing and supervising a collection of investments to ultimately meet the long-term financial goals and risk tolerance of passive or active investors, an institution, or a company, whether by means of actively managed funds or passively managed funds.
What is Index investing?
Index Investing is a passive strategy attempting to generate a return resembling a broad market index. Investors utilise this investment strategy to mimic the performance of specific index funds, which is generally fixed income index or equity, by investing in an index mutual fund, exchange-traded fund, or the components securities of the index funds.
Research dictates that, over a long time period, index investing outperforms active management. A passive approach eradicates much of the uncertainty and bias generally present in navigating the stock market.
What are some disadvantages of active management?
An actively managed fund is often not as tax-efficient as a passively managed fund and involves higher fees. Active managers establish their rates, and the investor continuously pays for their services in navigating their actively managed portfolios.
Furthermore, active management requires active managers, technical analysis professionals, and active operations that all demand compensation.
How does active management perform in the market?
Active management is a crucial player in maintaining market efficiency. Active managers put market prices in place for securities by buying and selling investments. Thus, an increase in active management prevalence results in greater market efficiency.
Market efficiency is advantageous because it promotes more investments in the market, encourages capital formation, and makes it simpler for investors to diversify their risk. Furthermore, active management is vital in capital formation as actively-managed portfolios buy initial public offerings of securities.
What are the primary goals of active management?
Active investors generally have many goals, including seeking high returns, managing risk, reducing taxes, and increasing interest income or dividends, along with goals unrelated to finance, such as advancing environmental, social, and governance standards.
How do active managers manage risk?
Active fund managers have the ability to manage risk nimbly. Consider this scenario: A global banking EFT must potentially hold a certain number of British banks, meaning the passive funds likely dropped after the 2016 Brexit vote. In contrast, a global banking fund that is actively managed likely reduced its reliance on British banks because of the higher risk involved that most active managers recognised. Furthermore, active managers manage risk utilising hedging strategies, like short selling, for example.
Get in touch with Alex here or at [email protected]
__________________________________________________________________________
Tilney (now rebranded as Evelyn Partners) is an award-winning financial planning and investment company that builds on a heritage of more than 185 years. They have won numerous awards and their clients include private individuals, families, charities and professionals. They presently look after more than USD70 billion.
领英推荐
At Evelyn, your personal wealth is their personal responsibility.
Evelyn's award-winning services are now available in Asia exclusively through Infinity, and can be applied to new and (probably) existing investments.
To learn more, drop Alex a line.
Click on the 'play' button above to see one of Evelyn's/Tilney's adverts.
Get in touch with Alex here or at [email protected]
Published by
Personalised financial planning, affordable investment solutions and award-winning management services for expatriates.
Published ? 4d
Like
Comment
Share
Reactions
Comments settings
0 Comments
Comments on Alex de Wit’s article
Open Emoji Keyboard
Personalised financial planning, affordable investment solutions and award-winning management services for expatriates.
More from Alex de Wit