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Since the global financial crisis in 2008, the markets have been unpredictable to say the least and it’s safe to say that 2018 was not their finest year. In fact Deutsche Bank have released research showing that the percentage of assets with a negative total return in US dollars hit an all time high of 93% in 2018, worse even than during the Great Depression.
However that bear did follow a lengthy bull run triggered by quantitative easing in many countries around the world. The fact that markets are cyclical is hardly a revelation. Investors have had to deal with ups and downs since markets began and have developed strategies and tools that can be used to protect against downside volatility.
The first of these is diversification. It is universally agreed that a broad spread of assets will protect a portfolio because the best performing ones will offset disappointing returns from the worst performers. Both passive and active investments can be diversified however actively-managed investments, while often perceived as a more expensive way of investing, present an additional advantage.
Of course, passive investment does have its place and many multi-asset portfolios contain passive funds to balance exposure. These investments track a target benchmark or index, such as the US S&P or the FTSE 100, and their performance will mimic that. Once the investment is purchased it functions on auto-pilot paying no attention to what the markets are doing. It is for this reason that these investments have lower fees and operating expenses than active management. As an aside, a word of warning if you have invested in older passive investments as some of these have relatively high fees. It might be worth checking with a financial adviser that your tracker funds really are offering value for money.
While less expensive, on the downside, most passive investments concentrate on the largest companies which can mean that investors are over-exposed to particular sectors. These funds are diversified but perhaps not broadly enough, especially at times like now when markets are particularly volatile.
This is where active management can offer better value over the sit-and-hold approach. Done well it will generate above-average returns on a consistent basis by taking advantage of market opportunities which tracker funds cannot. Active managers will recognise, anticipate and exploit short-term investment trends to deliver added value. Of course not all active fund managers succeed. Active investment management requires good judgement and a wealth of experience. Investment decisions must be backed by in-depth research into fund performance taking into account a wealth of factors.
And this is one of the things that sets the Tilney Group, Infinity’s investment management partner, apart from the rest of the market. As Tilney’s Managing Director, Jason Hollands, points out ‘The differences in return between the best and worst performing actively managed funds is enormous and simply cannot be explained by variations in fund costs but rather are the result of the investment decisions made. If you are going to invest with actively managed funds it is therefore vital to select the right managers and to always reassess the case for continuing to hold a fund when the manager or team changes as they inevitably do in a highly competitive industry.”
Tilney’s research into the performance of individual managers is meticulous. They look at the full track record of a manager for the duration of their entire career, spanning multiple employers to ascertain their ability to deliver consistently. This determines genuine skill and weeds out managers who have ‘lucked out’. But past performance is only part of the story, Tilney also look at a manager’s future prospects assessing their capacity, a fund’s structure and, of course, costs. It’s a comprehensive approach which pays dividends.
As the financial landscape becomes increasingly complex, active management is crucial to outperforming benchmarks and delivering above-average returns on a consistent basis. If your portfolio is made up solely of passive investments you will be missing a trick.
Infinity’s financial advisers can help you assess how diversified your portfolio is and whether the balance of passive and active investments is correct to deliver the returns you need. They can help you seek out additional opportunities that you can exploit to attain the best value. Infinity is Tilney’s exclusive partner in Asia so if you’d like to put your investments in the hands of the best investment manager in the business, why not book a review with one of our experts now at firstname.lastname@example.org?
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