Time to take a dynamic approach

For financial professionals only

With political uncertainty around US Presidency and Brexit finally settled, and vaccine news giving us all a boost, markets have been buoyed. And while, for now, lockdowns continue in various forms, global markets appear poised to continue their recovery.

The speed at which many markets recovered losses might remind investors of the dizzy days of the record bull run we enjoyed before COVID-19, rather than the double-digit losses of Q1 2020.  And positive sentiment usually comes with positive flows of money.

But how we choose to deploy those funds can have a big impact on the outcomes clients experience. Getting the most out of positive markets while trying to make the next market shock (hopefully not another pandemic!) less painful is a tricky balancing act. That next shock may not take 10 years to arrive, as the last one did.

Is an Active or a Passive approach best?

A rising tide lifts all ships, so through a bull run, passive vehicles will benefit from a strong tailwind. Passive inflows have been extraordinary through recent years, but clients moving into them may have had little experience of the impact of volatile or falling markets on their investments until Q1 last year.

Through and since that sell off, the tools at an Active manager’s disposal have come to the fore. They have the flexibility on when, and how much, they put into particular stocks or sectors, and can even avoid particular areas of the market all together.

This ability to be selective feels like an obvious advantage when investing, but it’s the dynamics of a market that dictate how important that advantage might be – and whether it’s worth paying for.

In a market where everything is providing a similar return, there’s less opportunity to add value for Active managers. If, however, returns are more spread out, there is more to be gained from picking the winners and avoiding the losers. So ultimately, more to be gained from paying active fees.

Are your clients Active or Passive investors?

The question for advisers now is whether their clients were comfortable enough in more challenging markets to track the market down again next time. That’s the trade-off for tracking it well while markets are up. Or, would their clients have been happy to pay a little more to enjoy the selective positioning of an Active portfolio? Let’s look at two scenarios:

  1. The client who doesn’t want to pay fees to managers who aren’t going to outperform the market

This client doesn’t want to pay fees to underperforming active managers, or only wants to pay fees to active managers where they can add value. Some advisers interpret this kind of cost consciousness as a clear sign of a passive investor.

But passive managers are not designed to outperform the market. They’re simply designed to follow it – whether it goes up or down. And while passive vehicles are cheap, they aren’t free. So by opting for an exclusively passive approach, you’re not delivering what this client wants.

  1. The client who wants to use managers with the ability to outperform the market

This investor, on the other hand, clearly understands that active managers can add value. But again, the ask is conditional – this client wants carefully selected, high performing active managers. In other words, active managers only when they can add value.

Finding a dynamic balance between Active and Passive

We often see advisers who recognise that different markets favour an Active or a Passive style opting for a 50:50 split.

But that doesn’t really fix the problem. You’re still paying for active managers in market environments that might not be suited to them – or tracking the market right to the bottom with the other half.

In the recent Active vs Passive webinar with the Paraplanners Assembly, I argued for continually reviewing the dynamics of the market, and positioning ourselves between Active and Passive managers on an asset class by asset class basis. That way, we only pay for active management in environments where they have the best opportunity to add value.

Quality is remembered long after price is forgotten

Cost conscious clients want to know they’re paying for something that delivers the best outcomes for them, in all market environments. A solution that provides that dynamic balance between active and passive could be the answer.

About Jasper

Jasper Thornton-Boelman manages Conviction, Parmenion’s flagship investment solution. Conviction blends active and passive funds to offer the best possible value for money. If you’d like to have a chat about it, please get in touch.

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.  

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