Active and passive investment management strategies are not mutually exclusive, according to new research by Russell Investments.
“The correct decision between an active or passive approach will vary from one investor to the next,” Russell’s senior consultant in Australia Nick Curtin said.
“Most importantly, our research shows investors can use both active and passive strategies together so long as they carefully assess the merits of each on a case by case basis.”
The new research indicated it is reasonable to expect very little difference in the average performance of active versus passive strategies where markets are efficient and indices are well constructed, and meet the investor’s needs and are easy to replicate.
However, the research stated many asset classes do not possess these characteristics.
Curtin said the inefficient construction of an index represents an opportunity for active managers to provide value for Australian investors.
“The commodities futures and the fixed-income indices are calculated in a way which is likely to cause bias,” he said.
“For instance, fixed-income indices are typically driven by issuing and retiring debt, which means a passive approach has a natural bias of continuously re-weighting the portfolio towards new supply. This may not be in the best interest of the investor.”
However, Curtin also highlighted the need to look at the costs associated with an active approach.
Investors should not only focus on the explicit active management fee, he said, but an assessment of other costs of adopting an active approach such as the financial and governance resources required to facilitate manager selection and ongoing manager monitoring.
