Blending Active & Passive: the Ultimate Investment Strategy?

20 May 2013

GIB Employee Benefits & Destiny Umbrella Retirement Funds answer this hotly debated question.

At a panel discussion hosted by GIB Employee Benefits, Chief Investment Officers from Coronation, Dibanisa and Momentum Manager of Managers (MoM) participated in a spirited debate. Passion and conviction was shown from both the active and passive points of view.

Allan Greenblo of Today’s Trustee, set the scene by suggesting that this debate is a precursor to the main feature in the National Treasury Paper on costs in the retirement industry. A recent Paper made the point that passive investment management is significantly cheaper but not inferior to active management and is underutilised in South Africa.

Karl Leinberger of Coronation expressed a view that there are good and bad active managers. He said that the more passive money there is in the market, the more inefficient the market becomes and that passive forces investors into buying high and selling low.

Craig Chambers of Dibanisa (passive manager) emphasised that economies go through various cycles. At some stages of the cycle, passive management will come to the fore, and at a different point, active management will outperform. Last year, approximately 41% of net flows abroad were captured by passive products.

Chambers put forward a practical definition of the preferred index, which incidentally is the one selected for the Destiny Retirement Fund Portfolios. He described the advent of the Share Weighted Index (SWIX) which takes the market cap and free float and strips outs the foreign ownership.

The SWIX has performed well over the past decade, so from that perspective one would imagine that there would be high interest in passive strategies, however the retirement industry has been slow to take up this strategy and even slower to utilise a blended strategy.

Sonja Saunderson of MoM said that both active and passive have a place and that MoM makes use of both, but in the right place and in the right proportion. A universal theme resonated amongst the speakers that a combination or blend of active and passive asset management is required, and the guidance for the Trustees to make this decision should come from the retirement fund consultant.

This was echoed by Glenn Gamsy, Managing Director of GIB Employee Benefits, who stated that this epitomises GIB’s approach to investing and clearly encapsulates responsibility and focus on using the correct asset allocation and finding the best manager at the right price.

Active vs. Passive

How to incorporate active and passive investment management into a successful asset allocation strategy is the key question. Based on GIB’s research and analysis, we do not believe there is necessarily a single answer.

Constructing a portfolio using only passive management may be viable depending on a fund’s average time horizon, and tolerance for risk. A portfolio designed with all active strategies can also make sense, potentially providing better downside protection and retaining the ability for managers to react to market conditions. For many, a combination of active and passive portfolio construction is optimal. The degree to which a portfolio is tilted in one direction or the other will vary largely based on a Fund’s particular sensitivities and definitions regarding risk.

In general, we believe that high quality active management is available in most asset classes; however, investing in passive management strategies in part will improve portfolio construction when used in asset classes that have a more difficult time outperforming their benchmarks.

All strategies, particularly those incorporating active management, must be undertaken with a focus on the long term. Markets move in cycles and what may look unbeatable today could plummet in another year. Having a disciplined and long-term approach is necessary irrespective of the strategy being implemented.

By utilising a combination of an index (passive component) as well as asset managers (active component) who understand the market, GIB Employee Benefits are actually able to enhance returns of the portfolio whilst controlling costs. Furthermore, the yield is achieved in a manner where the risk is managed effectively, and the volatility is reduced.

 

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