Justin Urquhart Stewart: Why it is vital to be tactical

The argument which is wrung out so often at investor conferences is that most tedious of debates between active and passive managers. Active managers talk about their conviction of investing beliefs – an interesting term in itself – and then opposed to them is the cult who preach the passive story.

The truth is that both have their strengths and both have their failings. Of course there is no single dogma that is correct, and frankly I treat such attitudes as not dissimilar to religious zealots focussed on their own narrow views and oblivious to the feeling, views and opinions of others.

The reality is that there are some very successful and talented active managers, but sadly very few when given the numbers that have proliferated around the globe. Furthermore, we are likely to be seeing an increasing consolidation of funds, as monies are welded together to try and save costs in an increasingly cost conscious investing environment. Among those active managers that are successful, an even smaller number seem to be so consistently.

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This, of course, is to ignore the fact that a specialist manager may well continue to be a good manager in their field, but that the markets may be moving against their sector or just that it is in the wrong part of the investment cycle. In fact, the same will apply to passive funds as well; it is fairly useless being in a precise index when that particular area is currently out of fashion or investment interest.

So let’s leave the minutiae of the funds, be they active or passive, as it is of course the creation and running of the entire portfolio that is the main driver of success, and here we come down to the key subject of asset allocation.

Over the past 12 years I have been able to view at close quarters the effects and issues of differing funds – both active and passive. The battle between the two has been, in my view, wholly constructive. After all, the passive managers will keep the active managers “honest” in terms of tapping at their heels to ensure they reach and beat their benchmarks.

While the passives have also driven down costs and allowed greater initiative in looking at the make-up of indices themselves by moving away from the traditional, somewhat dysfunctional, weighted indices of the FTSE100, for example.

Innovations around equal weighting of stocks in an index and flattening out volatility have created greater predictability and less volatility to portfolios that have been especially important in times of economic and financial stress. This – at a lower cost – has to have been an advance for investors.

However, it has been the greater ability to adjust portfolios’ asset allocation that has been the real development. From the years when stochastic modelling tools dominated IFA portfolios through to some of the new discretionary “models”, we can see that investment dogma has been creeping in as a means of trying to provide a simplified investment answer. Such portfolio models can be dangerous, though. When circumstances change, we must change otherwise we will look as effective as King Canute’s advisers on English Channel tidal flows.