Marry active and passive investing

The age-old debate of active versus passive continues to be one of the most highly contentious topics within the investment management space.

The debate is mainly driven by asset managers who have a vested interest in promoting one above the other.

This bias in the conversation can lead to a lack of objectivity with the result that advisors and clients are left confused by a debate that creates the impression that only one side can be right.

Old Mutual Wealth’s Roland Grabe says that a large portion of the active versus passive debate completely misses the mark.

“In terms of the implementation options that are available to financial planners in creating the most beneficial investment solutions for clients, it does not need to come down to choosing one investment strategy over the other.”

Of course, any passive manager will argue that active managers rarely add value after their higher fees and picking active winners can be somewhat of a gamble; while those on the opposing side will argue that success is possible with active management, even pointing out that some passive strategies are not much cheaper than their active strategies.

As some markets look more attractive to active management, while others look more attractive to passive management, Grabe suggests blending strategies within each asset class.

“Think of a market cap index fund as another manager you can appoint within each asset class, based on its merits versus active managers.

“Having this manager in a global equities portfolio will drive down your costs, as well as give you some predictability in terms of the return you’ll get relative to the market.”

In South Africa, the options in the property space or the bond market are more limited, and gaining exposure to commodities, inflation-linked bonds and hybrid asset classes will also be a struggle, as these might be neglected in a purely passive approach.

While blending active and passive balanced funds is an option, Grabe warns against giving up control over asset allocation. He says ultimately advisors have no control over the end result when blending balanced funds. – Moneyweb

Think of a market cap index fund as another manager you can appoint within each asset class, based on its merits versus active managers. Roland Grabe Old Mutual Wealth