(Money Marketing) - Traditionally, the DNA of the average model portfolio still retains a mixture of funds and passive ETFs across fixed income and equities which give the investor diversification and some level of outperformance.
However, the meteoric rise of passive ETF investing has done two things to the traditional model portfolio.
Firstly, the difficulty of active funds to outperform mainstream markets since 2008 has been notable which has prompted an exodus out of active funds into passive ETFs. This move has seen model portfolio swell with passive investments over active ones.
Secondly, with fees on passive investing being a fraction of those charged by active funds, model portfolios have been able to keep their fees low via using large amounts of passive funds over their more expensive active peers.
The difficulty of active funds to outperform mainstream markets since 2008 has been notable which has prompted an exodus out of active funds into passive ETFs.
This feeds nicely into the question of how this investing evolution positions investors in the extreme volatility of today’s market.
Growth vs value in 2022
The battle being waged in 2022’s market is an aggressive switch from growth stocks into value, ostensibly because investors have woken up to the idea that central banks are about to try and remove almost all fiscal stimulus (quantitative easing and interest rate hikes) in one go and that has not gone down well at all.
It’s akin to a parent telling a child they cannot have another slice of cake. The immediate reaction is one of tears but it’s been removed for the right reasons in the long term. Obviously at the time the child doesn’t see it that way.
Passive ETFs in this volatile market have no choice but to own the hugely over valued growth stocks getting sold off. In the US, the situation is particularly bad given how much of the S&P 500 is dominated by growth stocks. Avoiding exposure to the explosive parts of the market remains the mainstay of why people buy active funds over passive and it’s something I would wager a good few investors are being reminded of now.
Choosing the right tools
As we know investing is all about looking forward not back, so let’s look forward. It’s clear we are no longer in a market which just wants to go up and up, much to the dismay of passive investors. It’s also clear active management remains a tool to deliver a) portfolio returns but also b) protect those returns when the fur starts to fly, as it presently is – this second point usually gets overlooked in a bull market.
It’s clear we are no longer in a market which just wants to go up and up, much to the dismay of passive investors.
One must also concede, the fund industry cannot continue to charge excessive fees for active management. With ever-increasing levels of competition for client assets and a dramatic step up in rhetoric from the FCA about protecting clients through not over charging on fees, it’s clear pricing pressures are here to stay. Much to the benefit of the end investor. Hurrah!
If active management still needs a place in investors’ portfolios but so does competitive pricing, the question is surely: how can we deliver an active portfolio of high quality active portfolio for all clients (not just high-net-worth) for a passive price?
My answer comes back to the core of what an investment service means to me. It’s a professional investor using their experience and research on behalf of others to construct a portfolio to outperform the market but selected from funds and fund managers who are offering something different or something better than their competitors.
All too often it is these innovative boutiques that lose out to the flagship global funds with tens of billions under management. For those willing to invest into these opportunities often comes with very attractive low fees for doing so.
In 2010 there was such a fund house looking for founder investors. Fundsmith.
This goal of searching out boutique investment opportunities and competitive pricing forms the style of nimble, active portfolio which remains well-suited to this unpredictable market as well as doing so at a price point in the realm of passive investing.
By James Penny
James Penny is chief investment officer of TAM Asset Management