tmmonline.nz  |   landlords.co.nz        About Good Returns  |  Advertise  |  Contact Us  |  Terms & Conditions  |  RSS Feeds

NZ's Financial Adviser News Centre

GR Logo
Last Article Uploaded: Tuesday, December 5th, 3:27PM

Investments

rss
Investment News

Insync uncovers flaws in passive versus active debate

Insync Funds Management says the industry has taken at face value the argument that passive outperforms active, but a deeper dive indicates this is not necessarily so.

Wednesday, October 18th 2023, 6:00AM

by Insync

Insync Head of Strategy and Distribution, Grant Pearson, has written a White Paper which gives seven key factors in portfolio construction that demand full consideration before assuming the powerful marketing messages from index managers are relevant or correct.

1. Blending 2-3 active funds often does better than an index fund 
If devised properly by trained professionals, two to three active funds blended often do better than an index fund. Most investors using active managed funds tend to use a composite of them with various weightings that also shift over time. Intermediated inputs of some form are present in a very large portion of all active funds under management (FUM), be it model portfolios or forms of advised recommendations.

"This is a valuable layer of skill that impacts the reality for end investors," Pearson says. "Excluding this fact infers that such inputs and professionals offer zero value to the outcome. However, the evidence suggests they do add value."

2. Applying meaningful time-based measurements
Rolling Returns instead of commonly used point-to-point returns provide investors with far more useful assessments of historical returns, as they better account for the average result across all start/end months of the year, thus aligning an investor’s likely return experience.

"Index promoters and researchers have avoided using this superior measure of returns," Pearson says.

3. Challenging the over-simplification of index comparisons 
Using almost any month of ‘point-to-point’ returns, a cohort of 10-20% of active funds usually outperforms the relevant index fund.

"This is especially so outside extreme frothy markets," Pearson says.

4. Measure active returns, risk adjusted and in the hip-pocket
Active management is only accurately calculated at the investor’s dollar account level, not at the fund level because risk and volatility management are provided with active management, and this alters the dollar-based account balance.

"Two funds can post the same return ‘point-to-point’ yet have very different account balances simply due to the volatility in each. How often, how far and for how long a fund drawdown is, impacts account balances," Pearson says.

"For retirees siphoning off income and capital this is essential knowledge. It’s all in the dollar-based arithmetic, but this can’t be captured at the fund level where marketing is focused. Index funds have no risk or volatility management. Thus, along with the all-important hip-pocket is the cost/benefit of risk management in active investments. Both are crucial considerations."

5. Index comparisons rarely exclude companies with poor stewardship
Most active funds including non-ESG offers do have standards on this to various degrees.

"If you care about good stewardship and basic common values, then this needs to be accounted for in comparisons," Pearson said.

"Investors do care by and large, but that doesn’t mean they necessarily want ESG focused funds. Governance matters but indexing is devoid of this."

6. Poor index benchmark selection
Whole sectors of an index’s return are often pitted against a manager whose fund deliberately doesn’t invest in most of it (eg: emerging markets and resources). An active mega cap global equity manager is often compared to an entire index (usually the MSCI-AWI) that’s mostly comprised of non-large cap stocks and also in countries they wouldn’t ever invest in.

"One has to ask if this is even appropriate?"

7. The downsides of ‘dominated concentration’
The risk of concentrated investments, particularly in specific sectors or narrow asset classes, may not be adequately addressed by passive strategies. When a few large-cap stocks dominate an index, the overall index performance becomes highly sensitive to the performance of those stocks. If one or more of these stocks experience significant price declines, the entire index's performance can be adversely affected.

"Diversification is key in managing risk," Pearson said. "Concentrated indices lack the benefits of diversification, which can help cushion the impact of poor performance from a few individual stocks. Diversified portfolios tend to exhibit lower volatility and more consistent returns."

Pearson said the Paper uncovers some of the dangers of assuming passive funds deliver better than active approaches, which include that it may rob investors of a better hip pocket result, that it doesn’t properly manage risks and that it undervalues and undermines the worth of professional skill and research.

"Passive investment has a place but to nowhere near the extent it is currently being used in our industry, which is relying upon incorrect assumptions and omissions. We owe it to the end investor to look harder."

CLICK HERE for the Insync White Paper

For more info see https://www.insyncfm.com.au/

Tags: Active v Passive Insync Funds Management

« Diversification - Markowitz’s greatest giftHarbour Investment Outlook: Higher for longer, but how much longer? »

Special Offers

Comments from our readers

No comments yet

Sign In to add your comment

 

print

Printable version  

print

Email to a friend

Good Returns Investment Centre is brought to you by:

Subscribe Now

Keep up to date with the latest investment news
Subscribe to our newsletter today

Edison Investment Research
  • Electra Private Equity
    27 September 2021
    Introducing Hostmore and Unbound brands
    On 16 September, Electra Private Equity (ELTA) issued a trading update for its largest remaining hospitality brands, Fridays and 63rd+1st, and named the...
  • European Assets Trust
    21 September 2021
    Performance, income and a well-balanced portfolio
    European Assets Trust (EAT) aims to achieve long-term growth of capital through investments in smaller European companies (excluding the UK). EAT’s...
  • Georgia Capital
    13 September 2021
    Value creation on the back of macro recovery
    Georgia Capital (GCAP) posted a 13.2% NAV total return (TR) in local currency terms in H121 (15.2% in sterling), driven by an improved operating performance...
© 2023 Edison Investment Research.

View more research papers »

Today's Best Bank Rates
Rabobank 5.25  
Based on a $50,000 deposit
More Rates »
Cash PIE Rates

Cash Funds

Institution Rate 33% 39%
ANZ 2.75    -    -
ASB Bank 2.90    -    -
ASB Bank 2.90    -    -
ASB Bank 2.90    -    -
ASB Bank 2.90    -    -
ASB Bank 2.90    -    -
BNZ -    -    -
Heartland Bank 4.60    -    -
Kiwibank -    -    -
Kiwibank 4.50    -    -
Nelson Building Society -    -    -
SBS Bank -    -    -
TSB Bank 3.35    3.35    3.63
Westpac 4.50    -    -
Westpac 1.00    -    -
Westpac 3.50    -    -

Term Funds

Institution Rate 33% 39%
ANZ Term Fund - 90 days 4.20    -    -
ANZ Term fund - 12 months 6.10    -    -
ANZ Term Fund - 120 days 4.30    -    -
ANZ Term fund - 6 months 6.00    -    -
ANZ Term Fund - 150 days 4.50    -    -
ANZ Term Fund - 9 months 6.00    -    -
ANZ Term Fund - 18 months 6.00    -    -
ANZ Term Fund - 2 years 6.00    -    -
ANZ Term Fund - 5 years 5.45    -    -
ASB Bank Term Fund - 90 days 4.20    -    -
ASB Bank Term Fund - 6 months 6.00    -    -
ASB Bank Term Fund - 12 months 6.10    -    -
ASB Bank Term Fund - 18 months 6.00    -    -
ASB Bank Term Fund - 2 years 6.00    -    -
ASB Bank Term Fund - 5 years 5.55    -    -
ASB Bank Term Fund - 9 months 6.10    -    -
BNZ Term PIE - 120 days 4.30    -    -
BNZ Term PIE - 150 days 5.00    -    -
BNZ Term PIE - 5 years 5.45    -    -
BNZ Term PIE - 2 years 6.00    -    -
BNZ Term PIE - 18 months 6.00    -    -
BNZ Term PIE - 12 months 6.10    -    -
BNZ Term PIE - 9 months 6.10    -    -
BNZ Term PIE - 6 months 6.00    -    -
BNZ Term PIE - 90 days 4.20    -    -
Co-operative Bank PIE Term Fund - 6 months -    -    -
Heartland Bank Term Deposit PIE - 12 months 6.30    -    -
Heartland Bank Term Deposit PIE - 6 months 6.05    -    -
Heartland Bank Term Deposit PIE - 9 months 6.15    -    -
Heartland Bank Term Deposit PIE - 18 months 6.10    -    -
Heartland Bank Term Deposit PIE - 2 years 6.10    -    -
Heartland Bank Term Deposit PIE - 5 years 5.65    -    -
Kiwibank Term Deposit Fund - 90 days -    -    -
Kiwibank Term Deposit Fund - 6 months -    -    -
Kiwibank Term Deposit Fund - 12 months -    -    -
Kiwibank Term Deposit Fund - 150 days -    -    -
Kiwibank Term Deposit Fund - 120 days -    -    -
Kiwibank Term Deposit Fund - 9 months -    -    -
Westpac Term PIE Fund - 150 days 5.00    -    -
Westpac Term PIE Fund - 120 days 4.30    -    -
Westpac Term PIE Fund - 18 months 6.10    -    -
Westpac Term PIE Fund - 12 months 6.10    -    -
Westpac Term PIE Fund - 6 months 6.00    -    -
Westpac Term PIE Fund - 9 months 6.00    -    -
Westpac Term PIE Fund - 90 days 4.20    -    -
Westpac Term PIE Fund - 2 years 5.90    -    -
About Us  |  Advertise  |  Contact Us  |  Terms & Conditions  |  Privacy Policy  |  RSS Feeds  |  Letters  |  Archive  |  Toolbox  |  Disclaimer
 
Site by Web Developer and eyelovedesign.com