GAM: 2018 Outlook - The Merits of Active Management

GAM’s investment experts share insights on how active management adds value in their specialist fields.

The big picture – active vs. passive?

Larry Hatheway, group head of investment solutions and chief economist

The active vs. passive debate is largely misunderstood because it is misrepresented. Yes, it may be true that as dispersion picks up in markets that the contribution from ‘alpha’ (security selection) will constitute a larger proportion of overall return, which hitherto has been dominated by beta (easily replicated in low cost ETFs). But the fundamental flaw of passive instruments is that, alone, they cannot offer the genuine diversification that lies at the heart of effective investing. Over the past eight years investors have been seduced into believing that a ‘balanced portfolio’ of stock and bond ETFs offers diversification. Instead, the conventional ’60-40’ portfolio has delivered exceptional returns due to simultaneous bull markets in stocks and bonds. But that happy state of affairs is unlikely to last. As output gaps close and monetary policy is normalised the bull market in bonds is coming to an end. And if, as seems likely at some point, the adjustment is volatile, investors will question the value of investing in low cost instruments that are mere building blocks rather than well diversified set of holdings. When interest rates rise and stock prices wobble, the value of an active approach will shift to wealth preservation, which requires active asset allocation as well as non-directional sources of return, neither of which can be met via index-trackers. In short, the value of active is not just in beating upward trending markets, but even more so in the construction and management of portfolio outcomes... Read all experts insights here.