Deciding whether to use active or passive strategies in a multi-asset context really comes down to time horizon, according to Amalia Nuñez, investment director at First State.
Ms Nuñez believes in dividing a retirement pot into three buckets, short and medium term ones to provide ongoing income, and a third, longer-term bucket which has the aim of growing the capital value of the portfolio over the long-term.
She says the short and medium term pots of money need to be actively managed, as they are investment goals that are near term, and the requirement is for a reliable income in that time period.
For the third pot, which she says could have a time horizon of 10 years or more, she favours using at least some passive investment products.
Ms Nuñez says: “With a long time horizon for the third bucket, really you are just seeking market beta, that is the gains a market makes, so investing in a passive strategy is fine for this.”
Market beta is the returns achieved by a fund as a result of the whole of a market going up: this is what a passive investment delivers.
Actively managed funds are trying to achieve both beta, and alpha, that is, the return delivered above that of the market, as a result of the manager’s skill.
Shane Balkham, chief investment officer at Beaufort, agrees that time horizon is the defining characteristic.
He says: “For the earlier stages of retirement you do tend to need actively managed investments as you are trying to achieve income, but the portion of the assets you have which are for the longer-term, it can make sense to have some passive exposure there, because really you are investing for the very long-term.”
Considerations
However, for Michael Kelly, global head of multi-asset at Pinebridge, the current uncertainty in markets means passive investment strategies are likely to underperform in the short-term.
He says: “In the year ahead, the US and UK will join the EU and Japan in formally repressing interest rates below inflation.
"For investors to achieve rates that come close to compensating for inflation, they may need to venture into higher-yielding asset classes, such as hard currency-denominated emerging markets.
"These asset classes require active security selection and are not the terrain for ‘one size buys all’ passive investing. Tread selectively, and actively, with eyes wide open.”
Hard currency emerging market bonds are those issued, not in the currency of the emerging economy, but in a currency which is more commonly traded around the world, such as the dollar or the euro.
By investing in the hard currency version of the bond, an investor avoids the risk that the interest payments they receive will be worth less as a result of the emerging market currency falling in value.
