Few subjects get a debate going amongst investors and wealth managers as much as the passive versus active management one. In this post we put the case for active management.
Passive investments are tied to a major index, such as the Dow Jones or the FTSE 100. The main principle is that these kind of investments mirror what the markets are doing and don’t seek to outperform. Market ups and downs are ignored in favour of a buy and hold approach.
Active investing, on the other hand, involves a bit more tinkering. Investment managers will look at market conditions, see how particular funds and fund managers are doing and make investment decisions based on that research. The goal is to outperform the markets, although this is easier said than done.
And that’s exactly why we need investment managers – this is definitely a job best left to the professionals who have serious amounts of experience and dedicated research to base their decisions on. An amateur investor will find it difficult, if not impossible, to time the markets based on media reporting as once the news is out the boat will well and truly have sailed on buying or selling at the right time.
There are four main reasons why when put in the hands of a competent wealth manager active management can generate better returns than passive management. These are outlined below:
We agree with Tilney, our wealth management partner firm, that this is the best way to preserve and grow our clients’ capital over time. Owning large parts of the market is to be avoided and Tilney therefore shy away from businesses that are highly financially or economically leveraged i.e. that have high levels of debt or are cyclical in nature and therefore more vulnerable when market conditions are tough. Tilney limit exposure to investments in the banking, mining and energy sectors, which usually feature fairly heavily in passively managed portfolios. Indeed, this is one of the vulnerabilities of passive management. In 2018, Tilney’s performance validated this approach.
The price must be right
It makes logical sense that investors should never buy assets at a higher price than their intrinsic value and that doing so could harm long term performance. Passive investment often involves investing when prices are not right because capital is allocated according to the proportionate size of companies in an index. Investors are forced to mis-time – buying when shares are overvalued and selling when they are undervalued. It is incredibly difficult even for seasoned fund managers to consistently deliver market-beating performance for long periods but there are some that do manage it, which is why we only work with the best.
Individual company performance trumps geography
Successful investment the Tilney way means investing in exceptional global companies, irrespective of where in the world they are based with funds managed by exceptional global managers. Selecting the right manager is far more important than looking at the micro economic outlook for particular regions. Timing regional equity market allocation is nigh on impossible so Tilney ignore short-term market predictions and focus instead on high level asset allocation (the split between bonds, equities etc) to manage volatility and safeguard returns.
The higher cost is worth it
One argument often used in favour of passive rather than active investment is that the latter is more expensive. This is undoubtedly true. Typical costs for an actively managed portfolio would be 0.7% compared to 0.2% for a passively managed one. However, we would argue that the ability to consistently outperform benchmarks offsets this cost in the long term. This is something that Tilney have researched extremely diligently. Have a look at these examples of active funds which have been included in Tilney’s portfolios for more than five years and have consistently outperformed their respective markets, even once fees are taken into consideration. Findlay Park for example produced a return of 14 times the original investment compared to 4% for the S&P index as a whole.
Of course, we can’t stress enough that actively managed portfolios need to be put in the hand of competent professionals with a solid track record. That is why Infinity have forged a partnership, exclusive in Asia, with Tilney who are an award-winning discretionary fund manager who have proved that they can deliver the goods for our clients over and over again.
If you’d like to make sure that your savings are working as hard as they possibly can for you – and who doesn’t want that? – then why not Get In Touch with us and see what the Infinity/Tilney dream team can do for you?
A leading provider of expat financial services and wealth management services across Asia.