The active versus passive debate is a perennial but misplaced one. Striking the ideal balance between the two distinct investments can greatly influence the overall success and resilience of an investment portfolio in the long run.
Active investing within the fund management space seeks to utilise a hands-on approach to capital accumulation and preservation, benefiting from extensive research functions within investment teams that work in pursuit of discovering attractive investments within the marketplace.
The main benefit from passive investing is within the low maintenance nature of allocating capital into particular investment classes or indices without the need of undertaking extensive analytical market research. Investors should be mindful that low-cost passive market exposure may come at higher potential downside risk.
Risk management plays a pivotal role in both investment styles.
In particular, active investing facilitates fund managers to deploy highly involved strategies that are designed to generate returns regardless of the underlying economic environment. Such tactics may include capturing short-term opportunities, downside protection and appropriate sector allocation. Active fund managers are therefore better equipped to dynamically respond to such circumstances and may benefit those investors who are willing to broaden their risk tolerance to capture returns throughout the economic cycle.
For experienced investors looking to diversify their portfolios, the added versatility of active investment may be a crucial element in ensuring that the level of risk vs reward is appropriately sustained. In essence, the difference between an experienced investor (such as a retiree) looking to generate returns, and an inexperienced younger investor simply investing in passive investments in the long-term is fundamentally differentiated from the impacts of time, willingness to take risk and their understanding of emerging and evolving new markets.
Younger investors may sway towards passive style investments, as the quality of the investment class over the long run may better suit their financial needs.
On the other hand, experienced investors may be seeking to preserve capital and benefit from returns that may be generated without the underlying influence of time, in which case, active investment may be more suitable. While younger investors may be more willing to allocate 100 per cent of their portfolio to passive investments such as ETFs, experienced investors may consider assigning a 40:60 ratio of active to passive investment. This ratio can be tailored to the individuals’ financial needs and circumstances.
Equity investments over the past three years have generated substantial returns to managed funds, such as Datt Capital’s Absolute Return Fund, which achieved 17.27 per cent per annum after fees (as at September 2021) within that time. Comparatively, the ASX 200 index achieved 11.92 per cent p.a, exemplifying the consistent yet lower return nature of some conservative indices.
Striking the balance between active equity investment funds and other passive investments such as ETFs and the like can essentially provide investors with the best of both worlds, with the associated risk and return to be proportionally embedded within a particular portfolio. Experienced investors, therefore, may consider allocating a portion of their portfolio to both.
Emanuel Datt is the founder and CIO of Datt Capital.
The demand for ESG-based investments is surging and many asset managers now offer strategies that take into account a range of environmental...
The outlook for global real estate investment trusts (REITs) is positive, in large part due to the vigorous merger and acquisition (M&A)...