The great Active vs Passive debate: Which is safer during uncertainty?

ACTIVE – Tom River, senior strategist at Cardano.

Over the last five years, benign market conditions have provided the perfect environment for the passive management industry to thrive; as markets have rallied, passive funds have been able to harvest the performance at a low cost. However, the tide looks set to change. Political surprises in the last 12 months have increased uncertainty among investors and volatility is likely to become the new watchword across global markets. Only last week the market was caught off-guard by the General Election result. Looking ahead, uncertainty about Brexit negotiations, Trump’s fiscal reforms and rising interest rates all point to increasing risk for investors. Many will now be thinking about the best way to manage their portfolios through these unstable conditions. With many markets at, or close to, an all-time high, relying on positive market returns is likely to disappoint. Now is the time for high quality active managers to step back into the limelight to better manage these risks.

PASSIVE – Mark Harrison, director of publications at the CFA Institute.

Investors love transparent, low-fee, passive investing. They don’t need to get distracted by Downing Street. They don’t have to predict which stocks or fund managers are in vogue. Passive index investors can diversify their portfolios among different markets, asset classes, themes, factors, across time and with crisp efficiency at minimal cost. No surprise then that such a disruptive technology is wildly popular, with passive funds now controlling a third of the market value. Jack Bogle, the founder of the very first passive fund, warned recently in the CFA Institute Financial Analysts Journal against the temptation to trade unnecessarily: “changing your strategy at the wrong time can be the single most devastating mistake you can make as an investor.” Active managers can try and outsmart the markets, and each other, but their gains are quickly exhausted by transaction costs and their own fees. Better for most investors to surf the waves of uncertainty and capture long-term growth trends in our economy using passive funds.

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