When it comes to the active vs passive debate, we spend too much time asking the wrong question

From

Dugald Higgins

The active vs. passive debate is one of the most bitter and polarising debates in investment management. However, is this even the right question? And even if it was, what is the right answer?

Zenith Investment Partners, in its latest sector review of Exchange Traded Products (ETPs), believes former Managing Director of Barclays Global Investors (BGI), Steven Schoenfeld got it right in 2004 when he recognised that index and active management could – and should – work in tandem.

Fast forward more than 15 years and it appears that Schoenfeld remains in the minority, with the argument regarding active vs. passive gathering steam as managers on both sides vie to “prove” they are in the right.

For Dugald Higgins, Zenith’s Head of Real Assets & Listed Strategies, this argument is naive and largely misses the point.

“Investors need help to deliver on their financial goals, not a binary argument on approaches,” said Higgins.

“What investors need is a robust decision-making framework to choose the best available tools to achieve their goals.

“It’s important to start with the investor. Once you understand what their objectives are, you can propose the best investment strategy to reach those goals.

The attractions of index-based investing are obvious, noted Higgins, generally lower fees and removal of the possibility of manager error (active risk). When viewed through this lens, index investing is, therefore, a “can’t lose” strategy for an individual who is after a low-cost product and is not willing to take in excessive active risk.  However, it is also obviously a “can’t win” strategy if your focus is to beat a benchmark.

In response to this dilemma, Zenith has created a series of critical lenses which can be used to assess the key considerations of the issue. Zenith believes that using a multi-lens approach is more likely to deliver an appropriate outcome for the individual by creating a robust decision-making framework.

“With the evolution of ETPs spanning index, smart beta and active strategies, the industry is increasingly one of the key battlegrounds of this long-running debate,” said Higgins.

“The right portfolio setting for active or passive will depend on the individual investor’s objectives. Investors must ensure they have a robust decision-making process in place to determine which path has the highest likelihood of achieving optimal results.”

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