Pages Menu
TwitterRssFacebook

Posted by on Feb 16, 2017 in ETF Strategist, Investment Perspective, Market Insight

The Blurry Line Between Active & Passive

The Blurry Line Between Active & Passive

By Roger Nusbaum, AdvisorShares ETF Strategist

 
Barron’s had an interesting ‘other voices’ column titled The End Of An Active-Investing Era by Donald Callaghan. Most of the article was about difficulty of outperforming the passive indexes. Active versus passive is not the point of this post, that’s been written about 1000 times, other than to say there are too many real world variables to active versus passive for that to even be the right question.

A diversified portfolio likely includes both active and passive vehicles, owning any individual stocks is an active endeavor, certain strategies use passive vehicles in active strategies, an 80 year old client living comfortably off of Social Security and portfolio income is far more likely to care about that income while avoiding the market’s ups and downs and there are other points that make active versus passive the wrong question.

What was more interesting was the conclusion with Callaghan’s ‘four key tactics’

  • Invest for the long term without market timing
  • Invest globally
  • Be Contrarian
  • Allocate to underperforming sectors

Read the article for more color on the four keys but three of the four are active ideas and even the fourth one could be considered active. Really, Callaghan’s focus seemed to be on low fees, which would eliminate active managers from the portfolio, using index funds.

The first bullet point about not market timing is the one that isn’t active but could be. Rebalancing is arguably an active endeavor. A truly passive investor would let his allocation drift wherever (a point made by Cullen Roche). You may not market time but you might time yourself. There is a school of thought that says a year or two before you plan to retire you should reduce equity exposure to reduce the impact of the bad luck that goes with a bear market starting six months after you retire. If that resonates with you then that is an active endeavor.

There are more active ways to invest globally than there are passive if passive means owning everything and never making a change. A broad index, like one that excludes Canada, or a smart beta index that only owns value stocks, or a country fund may all track indexes but they are likely being used actively. Colombia has at times been a great performing investment destination and at other times a lousy performer. There are several indexed ETFs tracking Colombia, a 3-4% weighting wouldn’t be crazy, it would either outperform or underperform but the index won’t go to zero. Colombia has less than a 0.52% weighting (that is where the individual country list ends and ‘other’ starts) in the ETF tracking the All Country World ex-US. You could substitute many other countries into the above sentence and have the same conclusion.

Whatever you think it means to be contrarian, regardless of whether you’re using index funds, is an active strategy.

Buying cheap sector funds because they have been poor performers, like energy last February, would also appear to be contrarian and is definitely active.

All four of Callaghan’s four keys are valid regardless of their suitability for anyone. The most important determinants to financial-plan success is an adequate savings rate, minimizing truly self-destructive behavior and living below your means. If you’re plan requires portfolio growth then you do need to stay close to the market but managing your emotions is just as important as what you buy and how you buy it is, even if that means sacrificing alpha.

david@mediaworksllc.com

The AlphaBaskets blog provides frequent market insight and commentary by AdvisorShares Investments, LLC, created by AdvisorShares and other leading active managers.  AdvisorShares Investments is an SEC-registered investment adviser and the investment adviser to the AdvisorShares actively managed ETFs. The views expressed on AlphaBaskets should not be taken as investment advice or a recommendation for any of the actively managed ETFs advised by AdvisorShares.

X