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Passive Or Active?
The debate between passive investing and active investing is a hot and ongoing topic of discussion in the investment community.
The steady ascent of risk assets such as equities since 2010 has seen a steady adoption of passive investing styles and widespread creation of various sorts of passive-investing products. Many investors have moved capital away from active investment vehicles (such as unit trusts) and ploughed into exchange-listed index funds since then.
Despite the popularity of passive investing, we believe that active management is alive and kicking, and will have its time in the sun. In fact, we have been mentioning repeatedly in our outlooks and themes that active management should not be forsaken:
“Don't underestimate the value of active management:
- Following strong returns for both stock and bond markets over the past few years, investors have gravitated towards passively-managed investments such as Exchange Traded Funds (ETFs), with Morningstar data suggesting that passive mutual funds in the US have continued to see inflows on a one-year basis while actively managed funds have seen net redemptions (as of end September 2016). With bond yields at still low levels and selected equity markets trading at premiums, we think actively-managed investments are more appropriate, with active stock-pickers able to shun more expensive stocks in favour of more attractive ones, while an era of rising interest rates coupled with historically-low rates means credit selection, currency expertise and a more flexible positioning should aid in driving fixed income strategy returns to a greater degree going forward.
- While ETFs have their benefits such as taking advantage of intraday volatility to capture low prices and avoiding the potential of underperformance by an active fund manager, strong active management is likely to provide investors with stronger returns over the long term.”
As asset markets become increasingly richly-valued, it is more optimal to adopt actively-managed strategies in order to navigate market conditions in the future. A recent survey by Natixis revealed that a majority of institutional investors are of the view that the current environment favours active management, and that they had anticipated the recent bout of volatility and had cushioned themselves by adopting more active strategies.
In Arduous Times, Active Management Is Key
The recent bout of volatility in financial markets is a healthy wake-up call that markets do not go up in a straight line, and that investors need courses of actions to deal with a normalised volatility regime (after a period of low volatility).
Natixis’ survey also showed that investors believe that it is important to invest in alternatives to diversify portfolio risk. These institutions tend to opt for private equity for alpha generation, and commodities and real estate vehicles for inflation-hedging and managed futures for mitigating volatility risk.
While some of these instruments or vehicles are sophisticated and may be complex, we at FSMOne think that actively-managed strategies are a viable course of action. As explained earlier, active managers can underweight or avoid expensive market segments or adopt flexible positioning in bond markets to navigate an increasing interest rate backdrop.
If you have been following our commentaries, our MAPS portfolio team have been taking measures to ensure that investors are properly positioned, and this has shown up in performance numbers: in our recent flash update, all our managed portfolios have held up better than their composite benchmarks.
Chart 1: Recent Performance Of MAPS Against Benchmarks
Chart 2 and 3 below shows year-to-date performance of our MAPS portfolios against global balanced and multi-asset funds available on FSMOne:
Chart 2: Recent Performance Of MAPS Against Global Balanced Funds
Chart 3: Recent Recent Performance Of MAPS Against Global Multi-Asset Funds
When you have a portfolio that has a lower drawdown during market sell-offs, or lower volatility as compared to the broader markets, you will be less inclined to panic, lowering the chance that you will make knee-jerk reactions to market movements. This will help you stay invested and potentially, capture the upside when markets recover. This is something indexing can't provide.
If You Are Unsure, Opt For MAPS
MAPS was launched as our online portfolio management service for our investors back in December 2016 with the aim of assisting you to invest globally and profitably. The service features an array of five portfolios, with investors able to select between income-themed and growth-oriented portfolios, based on their individual needs and risk appetite.
With as little as $5,000, you can gain access to a well-diversified portfolio of funds, chosen by our portfolio team – yes, they do everything for you! If you are new to investing or do not have the time to manage your own portfolio, we’re here to help: click here to get started!
If you have any more questions, do not fret! Look to our friendly and helpful team of investment advisors for help!
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