The unseen value of active management

March 23, 2017 Categories: Multi-asset

When it comes to achieving outcomes, I believe that there is no purely passive approach. We all need to be active investors in some way. We all make choices, saying yes to some market exposures and investment strategies and no to others. That’s why, at Russell Investments, we believe in both active and passive approaches—as part of a multi-asset investment solution to help achieve desired outcomes. Our decades of asset allocation expertise help us objectively recognise that there are appropriate situations, market cycles, and circumstances for both approaches.If you only listen to the noise in the press over the last few years, you might think active management is limited to just picking stocks within a single asset class. But there’s more to an active approach. Investors who choose not to participate in active management run the risk of missing the many potential benefits that can come with it. Of course, like all investments, active management carries some level of risk.

  • Asset-allocation – Active management includes vital allocation decisions across asset classes. And those asset allocation decisions can have far higher impacts on portfolio returns than just the cost of fees. The fee difference between active and passive investment choices is often small enough to be measured in basis points (a percent of a percent, or .001%). Meanwhile, studies suggest that more than 90%1 of the variation in investor’s return is determined not by fees, but by asset allocation. But these days, with so many relatively new ways to achieve specific factor or sector exposures, how do you know what to choose? Bank loans, REITs, infrastructure, low volatility, momentum, emerging markets? When do you lean in? When do you lean out? An asset allocated, actively-managed investment solution can help.
  • Dynamic management – Dynamic active management—the real-time management of portfolio exposures to specific factors, countries, sectors, or currencies—can be used to help to avoid downside risk in chosen asset allocations. With this kind of focus, active management works to help create a smoother ride that can help to keep investors from exiting the market at the worst possible time.
  • Precise factor exposures2– Every investor has a unique situation. Some require a defensive position, aimed at reducing downside risk. Others want growth amplified, whether in their home country large-cap equity exposure or in varied market sectors. And the more varied or less covered the sector, the less likely that sector has the maturity and predictability that passive investing so often follows. To help manage all of this, we believe it is important to work with an expert at evaluating and selecting active managers around the world—with research-proven expertise in local, specialised market sectors, including emerging markets, alternatives, infrastructure, and more.
  • After-tax returns. – As so many of us have heard over the years,
    “It’s not what an investor earns. It’s what they keep.” Being active around after-tax returns is often an underappreciated way active managers can help to provide value to investors. Unlike index-based passive investing, active management can use an expanded toolkit to actively maximise after-tax returns. This includes active loss harvesting—potentially increasing the absolute return an investor sees. Active, by its very nature, strives to do better.

These are just four potential benefits of active investing. But, as I said at the beginning, we believe investors have the most potential to achieve their desired outcomes when they combine active and passive management as part of a multi-asset solution for their investments.

I plan to write more on this topic in coming months, including helping to answer the question: What’s the right mix of active and passive in a portfolio? This is a deep topic with so much to evaluate. Luckily, with over 40 years of multi-asset investing experience, our team has a lot to share.

1Sources: CFA Institute and Morningstar, IBB Associates publication
2Factor exposures is an investment strategy in which securities are chosen based on attributes that are typically associated with higher returns. When choosing exposures, investments choices are based on a high level of granularity; specifically, more granular than asset class. Common factors reviewed include style, size, and risk.

Jeff Hussey,

Global Chief Investment Officer

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