The active versus passive investment debate seems unlikely to declare a clear winner any time soon.
Some investment advisers are passionate about the virtues of a passive approach to investing; using index tracker funds and a ‘buy and hold’ strategy.
Others see the merits of using actively managed funds and tactically adjusting portfolios in an attempt to capture market value.
Some advisers, such as Informed Choice, can see the advantages in both approaches, so blend the two in order to achieve the best results for clients.
Where a comparison is made between active and passive, it is important to make a fair comparison.
We have been critical in the past of some passive advocates who have made an unfair comparison on costs, comparing the annual management charge of passive funds (which exclude advice and platform costs) with the annual management charge of active funds (which include fund management, advice and platform charges).
Once you add advice and platform costs to the AMC of a passive fund, suddenly the gap between total charges doesn’t seem as large. This is particularly relevant when you consider the practice of many passive advocate advisers who seem to hike up their advisory costs to offset reduced fund management costs.
Some new research from Premier Asset Management has added an interesting dimension to the debate.
Rather than consider the average performance of actively managed funds, they have looked at weighted averages which take into account the size of funds.
This seems to us to be much fairer than comparing the average performance of index trackers with the average performance of actively managed funds. Instead, it goes some way to comparing the former with a more likely outcome from the latter.
Larger actively managed funds, which have attracted more investor cash due to their success and popularity, make for a fairer comparison with the typical returns from passive funds.
Premier Asset Management found that, in some sectors, the weighted average return beat the index return.
In the IMA Asia Pacific excluding Japan sector, for example, they found a five year average return of 27% compared to 34.8% for the FTSE World Asia ex-Japan index. The weighted average return for IMA Asia Pacific excluding Japan however was 37.4%, beating the index.
This finding was repeated in the IMA Global Emerging Markets sector, which had sector average performance of 23.9% over five years compared to an index return of 27.4%. The weighted average return in the sector was a better 32.2%.
Do weighted average returns represent a fairer point for comparison with a passive approach to investing?
We feel that this research adds some important balance to the debate which we have no doubt will continue.
Our view at Informed Choice remains that active management is right in some circumstances and passive is right in others. Investors get the best deal when their adviser is prepared to consider both options, selecting what is most suitable depending on asset type and regional nuances.
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