ACTIVE VS PASSIVE: HOW TO HAVE YOUR CAKE AND EAT IT

Following long periods in which financial markets have been delivering attractive returns, the voice of the passive investor tends to be heard most loudly. These are periods in which it is relatively easy to deliver positive returns – the rising tide lifts all boats.

However, if returns become harder to come by, for example during periods in which markets are flat or falling, those who advocate active management tend to have a stronger voice. Judgements that drive selective investment decisions can make the difference between a disappointing market return or an attractive active fund return. When the tide goes out, as the saying goes, you find out who has been swimming naked.

At St. James's Place, when we are constructing portfolios and building our multi-manager funds, we can rely on a proven track record of identifying fund managers that are best-in-class at what they do, partnering with them for the benefit of our clients and maintaining our relationship with those managers so long as they stick to the disciplined investment process that attracted us to them in the first place.

However, we don’t just use active strategies within our portfolios. We acknowledge that not all markets are the same, and different investment styles may be more or less effective in different regions, asset classes and circumstances. As a result, we are firm believers that there can be a role for active and passive investments in a successful asset allocation strategy. When thinking about the most effective ways of constructing a portfolio, we want to be able to utilise a broad range of investment choices. That means acknowledging the attractive features of active and passive investing – and all the shades that sit between them.

At one end of the spectrum sits the pure passive strategy, which simply replicates the constituents of a particular market or index, to deliver very similar performance characteristics – the returns, volatility, peaks and troughs, should all be very much like those of the index that is being passively tracked. These tend to be low-cost strategies and investors receive broadly what they expect – market-like performance.

At the other end of the spectrum lies the genuinely active fund manager, making selective decisions on where to invest based on fundamentals and with conviction in a tried, tested and proven investment approach. This relies on qualitative human judgements, supported by all sorts of technological and data-driven inputs that are designed to provide a competitive edge against the market and, ultimately, the potential for sustainable long-term out-performance in excess of fees. Active strategies are therefore higher cost and investors must accept the risk that they won’t outperform in all market environments and may experience prolonged periods of underperformance.

In between these extremes, lies a range of different strategies which rely to an extent on technology to make quantitative judgements rather than qualitative judgements. This is known as active quantitative management. It can be delivered at a lower cost than active fundamental management, but it still retains the potential for better returns than the market will deliver, albeit with no guarantees.

Depending on what a portfolio is trying to achieve, there is a role for any or all these options within an asset allocation strategy. Our aim is to build the most effective portfolios to deliver your needs and goals. In pursuit of this aim, it is possible to blend different elements of passive and active investment within the same strategy, to gain complementary exposure to the more attractive characteristics of both. In the modern investment world, therefore, you really can have your cake and eat it.

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

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