Active and Passive Investing: Capturing the Best of Both Worlds

24 July by Joe Byrne in Investments, Market Update

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. 

Market & Portfolio Update – June

Global share markets had a strong positive performance in June, rebounding from May’s weakness, but in a somewhat volatile fashion. While over the long-term companies are valued according to their earnings, in the short-term they can be driven by investor sentiment and the current period is no exception. Global share markets rose 6% in June where the US market experienced its strongest June since 1933. This completely offset May’s weakness (the weakest May since 1970) and supported fund's strong gains so far in 2019, with a typical balanced portfolio up 10% over the last six months.

Fixed Interest investments continued to perform well, as market interest rates declined around the world, and yields on NZ bonds fell to new lows. This is a helpful source of support for economic growth, by helping make financing more affordable for a wide range of borrowers. 

NZ and Australian shares also performed positively. Our local markets continue to be supported by their relatively defensive characteristics and dividend yields, which are well above the global average. These healthy dividends are looked upon favourable by investors when global and local interest rates move lower as we have continued to see.

 

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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