Some financial advisers are wedded to the use of passive investment funds, whilst others prefer active fund management.
Here at Informed Choice, we believe that actives and passives can work well together.
In the latest edition of New Model Adviser, a Citywire publication, I was interviewed for their Smart Beta feature, explaining how we blend actives and passives when constructing portfolios for our clients.
For some of our more cost conscious clients, we construct passive only portfolios, although these do come with some limitations.
I explained in the Smart Beta column that we are unlikely to recommend passives for European equities, where investors could end up buying a lot of the ‘rubbish’ along with more positive investments.
We would also be wary about recommending passives for the commercial property asset class.
Our preference here is to replicate the UK bricks-and-mortar market, and there is a lack of availability with these funds, as passives tend to be property securities.
Where we believe passives can play an important role is in large, efficient markets.
For US equities, for example, we moved to mostly passives about four years ago, after realising that active managers struggle to outperform.
This is increasingly becoming the case in the UK as well.
Where active funds continue to offer a compelling argument is in smaller markets, particularly when the manager invests to obtain a high active share, rather than simply acting as a pseudo tracker fund with higher ongoing costs.
For global emerging market equities, for example, the tracking error from passive funds tends to be much greater than it is in US or UK equities.
The transparency being driven into fund management as a result of the Retail Distribution Review means there is now less of a gap between management fees for passive and active funds.
The ‘clean’ share classes we are starting to see for active funds are typically charged at 0.75%, which is much closer to the 0.4-0.6% charged by passives than the old 1.5% active fund charge (which included platform and advice costs).
For as long as markets continue to favour different approaches to investing, we will continue to recommend a mix of ‘smart beta’ and ‘smart alpha’ fund solutions.
Photo credit: Flickr/Vancity Allie
