There is much debate about whether active or passive investment strategies produce the best long-term returns. We do not see the two as mutually exclusive.
Conventional wisdom would hold that, in the long term, active management would deliver the best returns although in the short term losses could be greater. Active management may involve an investment manager selecting individual funds or stocks on the basis that his research has led him to conclude that the particular assets have the greater potential, either as long term propositions or as short term tactical fliers. On the other hand, the manager might base his selections on a broad view of which direction national, regional and global economies may move, factoring in considerations such as the effect of pan national regulation, environmental challenges, scarcity/glut of resources etc and invest according to this grand vision. Either way much of his success is down to out-guessng or out-analysing competing alternatives.
Passive investment involves aligning assets to match a particular index, whether this is nationally, regionally or globally based. Usually these are known as Tracker funds as they will closely reflect the performance of such indices as the FTSE UK All-Share, the S & P Global 1200, the FTSEurofirst 300 etc. This means that there cannot be a realistic expectation of consistent above average returns but it also means that in difficult times losses should not be too far out of step with the average. The limited degree of pro-active intervention helps to reduce management costs of such funds and can sometimes compensate for any performance gap when compared to an actively managed fund. Most ETF (Exchange Traded Funds) are set up on this basis, many of them tracking commodity indices, and can offer cost effective exposure to market risks and opportunities.
As we believe that the first goal of wealth management should be wealth preservation, at Chamberlain we make diversity the cornerstone of our investment strategy. For example, 50% of our model equity portfolio is directed towards the Vanguard FTSE UK Equity Index and the HSBC FTSE All Share Index Funds, both very low priced FTSE All-Share trackers. The balance is split between active funds in the UK, Europe, USA and Asia and includes the globally exposed Jupiter Ecology fund selected not because of short term performance but because we take a view that, over the long term, companies and institutions that embrace the concept of environmental responsibility will be better placed to prosper in a world where the gradual trend is towards environmentally focused regulation.
We do not dismiss the potential for growth that active management offers but do not accept it as inevitable that active management will always deliver better long-term returns, particularly bearing in mind the additional cost. We think the example of Strawberry the parrot is a salutary lesson in this respect (see Spring 2010 edition of Nurture)
Rather than take sides in the Active v. Passive debate, we believe that the best hope for wealth preservation lies in portfolio diversification and volatility management.
