- In this paper, we tackle the question of whether to employ active or passive investment management1 and conclude that both can be important elements of a well-constructed portfolio.
- Many sophisticated institutional investors such as sovereign wealth funds, endowments, foundations, and hedge funds have recognized the importance of both active and passive investment strategies in their investment solutions. The question is not “either or”, but rather how to combine the two approaches in order to maximize returns and minimize volatility and cost.
- The key to determining an appropriate balance of active and passive strategies is to decide in which markets and asset classes it makes sense to simply have broad-based exposure, and in which markets investors with resources and expertise can reasonably pursue excess returns (also known as “alpha”).
- Pembroke believes in pursuing excess returns in less efficient segments of global markets including small-cap equities, emerging-market equities, corporate bonds, and select areas of large-cap markets. In more efficient market segments, Pembroke believes in minimizing cost by using passive strategies such as exchange-traded funds (ETFs).
- The GBC Global Balanced Fund (“the Fund”) combines Pembroke’s experience and capabilities in active investment management, portfolio construction, and risk management with low-cost, passively managed funds to create a single, diversified vehicle to pursue long-term capital appreciation in global capital markets.
- The GBC Global Balanced Fund provides clients with several important benefits. The first is simplicity – a single vehicle that delivers low-cost exposure to global large-cap equity markets, the pursuit of excess returns in small-cap and emerging-market equities, and income from Canadian corporate and government bonds. The Fund’s second major benefit is asset allocation – its automatic rebalancing protocol means that the Fund maintains its strategic asset allocation, which is generally 70% equities and 30% bonds, by responding to market movements. The third consideration is cost, with the 80% active / 20% passive split reducing fees for clients.
Innovations in Wealth Management: Active plus passive investing
Innovation is the competitor’s response to competition; it drives technological disruption in all industries. The best solutions win. At Pembroke, we identify companies with new solutions to meet customer needs, large underlying market opportunities, and long-term earnings power. While we’re at it, we must shine the same light on ourselves and ask the question: what innovations are changing the wealth management industry? How can we respond to the changing landscape to improve our product offering and better meet client needs? Answering these questions, and underwriting our conclusions with our own capital, is one of the most challenging things we do. To remain relevant, we must adapt and innovate while holding our principles and values constant.
One of the most significant trends in the investment industry is the rise of passive investing. Asset flows into passively managed exchange-traded funds (“ETFs”) have increased and gained market share over actively managed funds. For years, active investors have decried the risks of passively managed funds. Passively managed funds are constructed to track a benchmark, index, sector, or factor. Actively managed funds are typically managed with objectives that include beating benchmarks, indices, and sectors. Yet passively managed funds have been beating many actively managed funds at a lower cost. Active managers are on the defensive and must demonstrate the ability to add value in order to survive. In the investment world, this skill is captured in “alpha”, which measures a portfolio manager’s ability to generate returns above an index or benchmark that are large enough to justify higher management fees.
For many years, there was a schism in our industry; an investment firm either specialized in active management or in passive management. Those days are now over. The curtain fell when the most sophisticated investors in the world, including sovereign wealth funds, endowments, foundations and large pension funds recognized the value of having both active and passive investments in a portfolio. Today, the top holders of the world’s largest passively managed ETFs include Asian sovereign wealth funds, European central banks, state pension plans, and other sophisticated institutional investors. The key to determining an appropriate balance of active and passive strategies is to decide in which markets and asset classes it makes sense to simply have broad-based exposure, and in which markets investors with resources and expertise can reasonably pursue excess returns.