Since the RDR forced costs to the forefront of advisers’ minds, the level of debate regarding passive investing has become, perhaps, disproportionate to those taking a binary stance over whether they invest via passive instruments or not.
Yet one area attracting recent attention is multi-asset passive investing.
Seven Investment Management (7IM) was one of the earlier entrants into this space, launching its Asset Allocated Passive (AAP) range in 2007.
Chris Darbyshire, chief investment officer at the group, says clients are starting to shift away from their traditional multi-manager products, in favour of the AAP funds, and believes this trend will broadly continue.
He explains: “Multi-asset is very different to other models of investment. Asset managers tend to sell on ‘star managers’, whereas with multi-asset you are adding value via the asset classes, so the manager becomes less important.”
While a useful approach in terms of key-man risk, especially at a time when high-profile manager moves are so prevalent, Octopus Investments’ Oliver Wallin believes putting the onus on an individual might expose any cracks in the armour.
The investment director of the company’s multi-manager team says: “You can’t generate alpha because you’re using beta strategies, so you are putting a lot of pressure on the active asset allocation to get enough alpha to cover all your costs and get your client some return.
“Advisers need to be aware that the decisions of that manager are their sole source of alpha, which puts a lot of pressure on that part of the portfolio. As multi-managers looking to diversify and control risk, we think that is an unbalanced level of manager risk.”
Legal & General Investments runs a 27-strong team of asset allocators, and so arguably spreads that responsibility. Hugh MacTruong, proposition manager of multi-asset and alternatives at the group, says many of the passive multi-asset ranges borne out of multi-manager specialists will still incur a degree of double charging, something they avoid by having in-house capability. But he says he does not believe in “passive for passive’s sake”.
“Physical property may be a better diversifier than a real estate investment trust [Reit], delivering a better IPD [index] return through the active vehicle. And the Reit may have more equity-like characteristics during market shocks.”
Other asset classes not traditionally accessed passively include certain areas of the high-yield market, where liquidity may raise concerns.
“In an asset class like high yield, tracking becomes more difficult,” Mr MacTruong says. “To avoid blowouts you may be better to have an active manager, because a pure passive vehicle may hold the most indebted company as the largest weighting in a high-yield index.”
He points out that 30 or 40 years ago similar comments may have been made about emerging markets, for example. But as structural changes take place and these markets become more liquid and efficient, tracking becomes more commonplace.
“You might not track frontier markets now, but the market is evolving such that one day it will be more likely,” he adds.
Mr Darbyshire agrees. He prefers trackers to exchange-traded funds in many cases. He trades stock and bond baskets directly and deploys equity futures to avoid trading frictions that can occur with buying direct equities. He is also a strong proponent of the investment trend ‘smart beta’.
“Most of the innovation we are seeing right now is in the passive space; it seems to be continually evolving,” he says.
But in some areas of the market, passive replication is simply not possible. Mr Wallin identifies a major shortcoming as the lack of long/short or “manager-skilled” presence.
He says: “I am looking to build a portfolio from a universe containing all the asset classes available, with no limitations on my access. The biggest holes in many multi-asset offerings seem to be in their alternatives package. That is a weakness from our perspective.”
Sam Shaw is a freelance journalist
Passive investing in numbers
2007: 7IM launches its Asset Allocated Passive range of products
27: The number of asset allocators in the team at Legal & General Investments
5: Number of funds in the AAP range run by 7IM
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