When assessing the use of fund managers, investors should not look at the choice between active and passive management as mutually exclusive because that mindset might cause them to miss out on valuable return opportunities, according to a senior financial services executive.
“As investors and advisers focus on building portfolios that are optimised for risk, return and cost, the strategy is shifting to one that blends both active and index funds, rather than one that focuses exclusively on one investment style,” BlackRock Australia head of retail Mark Oliver said.
“For example, active funds are best considered for asset classes that are difficult to represent with an index, such as some emerging and debt markets.
An active management approach has the potential to take advantage of the many illiquid issues that are often part of such asset classes.
“Other asset classes, for example domestic equities, may lend themselves to indexing, as they can be more readily replicated and implemented.
Indexing can also be utilised for asset allocation strategies.
“By blending both approaches, investors can harness the advantages of each and create a more flexible and diversified portfolio.”
Oliver added market conditions should play no part in deciding which investment method was more suitable for an investor’s requirements.
He said BlackRock’s research indicated adopting a long-term, strategic approach to incorporate a blend of both investing styles was more productive than trying to continually switch from one style to the other during different market circumstances.
“Investors increasingly realise that attempting to time markets and trying to trade in and out of stocks or bonds to minimise losses is difficult. Equally, trying to time an active manager’s performance is also difficult,” he said.
“Having identified skilled active fund managers, investors should be prepared to remain invested long enough, at least through one economic cycle, to give the manager enough time to generate the positive returns sought.”
He pointed out active managers with broad mandates might produce the best investment outcomes.
“One of the most useful formulas in finance is the fundamental law of active management, which basically states that an active manager’s ability to add value is a function of his or her skill and the ‘breadth’ of the mandate,” he said.
“What this implies is that multi-asset strategies, defined as those with a wide range of securities, countries, sectors or asset classes, provide more fertile ground for active managers.”