Active and Passive Investing: Capturing the Best of Both Worlds

24 July by Joe Byrne in Investments

Active and Passive Investing: Capturing the Best of Both Worlds

Investors have been debating for decades the merits of active or passive (index) investing, and no doubt this will continue into future decades as both sides have some good points. Rather than take an extreme view one way or the other, we have used the best of both approaches to complement each other within client portfolios. We call this a hybrid approach.

So, What Are the Key Differences?

Active investing involves deliberately making investment allocations in individual shares, bonds, or asset classes that differ from the generally accepted market index. This is done in expectation of delivering a better return outcome than the index or managing risks. Passive investing, on the other hand, involves making investment allocations that simply match the allocations in the index, thus matching the market return. The biggest positive of passive investing is that over the long-term, markets are good at efficiently capturing the performance of the wider economy. However, this means passive investment strategies tend to be the set-and-forget type, which also means that downside risk management can be limited.

The Best of Both Worlds Passive vs Active

We included both active and index investments in client portfolios, to gain the best attributes of each approach. Index investing is good at achieving very wide diversification, particularly in global markets, so having some ‘index’ type allocation can help give a broad base to investment portfolios. Around this base, active management strategies (sometimes also called tilts) can be used to deliberately manage opportunity and risk. These can include allocations to carefully chosen specialist global fund managers, company analysis closer to home in NZ and Australia, and asset allocation tilts to, or away from, different areas (like shares, bonds or currency management decisions).

This process can give flexibility in three main areas; giving some ability to actively capture gains or protect capital in down markets, the ability to control specific risk factors (think high-risk credit investments during the GFC) and having a mindset that helps identify unique opportunities rather than following the crowd.

This process can give flexibility in three main areas; giving some ability to actively capture gains or protect capital in down markets, the ability to control specific risk factors (think high-risk credit investments during the GFC) and having a mindset that helps identify unique opportunities rather than following the crowd. 

 Article by Joe Byrne, BA, AFA - Read More

Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular investor’s objectives, financial situation or needs.  Any opinions contained in it are held as at the report date and are subject to change without notice.  This document is solely for the use of the party to whom it is provided.

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