The growing passive investing sector means that active management is not the only strategy available to investors in global opportunities.
The IMA annual survey 2013-14 revealed the extent to which passive management strategies are being used across the UK managed asset base. It reported an increase from 17 per cent in 2006 to 21 per cent in 2010, climbing to 22 per cent in 2013.
One reason for the apparent growth in passive investing among investors is the cost-effectiveness of these products. For global opportunities investors, passive funds’ ability to offer exposure to many different regions and asset classes is also appealing.
Neil Cowell, head of UK retail sales at Vanguard, says: “Index funds have been increasing in popularity because they offer investors a cost-effective and straightforward way to invest in a variety of markets or market segments.”
But Mr Cowell cautions that UK investors tend to demonstrate a “home bias”, which often results in a concentrated portfolio that ignores large swathes of the investment universe.
He elaborates: “In both bond and equity markets, investors can benefit from global diversification using passive funds.
“Investors aiming for the most efficient portfolio might wish to consider holding a global portfolio containing all securities according to their actual market weight. But few investors actually want that and many feel safer with a certain amount of home bias.”
So how can an investor establish a truly global portfolio of passive funds?
“The good news is that investors can achieve great diversification without moving to fully market-proportional allocations in both equities and bonds,” says Mr Cowell. “To do that, rather than adding a few global securities to a UK portfolio, a good first step might be for investors to start with a globally diversified, passive portfolio and just add enough local exposure for them to be comfortable with.”
Chris Darbyshire, chief investment officer at Seven Investment Management, agrees that passive products no longer just offer access to equities.
He notes: “I think there are more and more interesting opportunities available to invest passively in other asset classes, such as fixed income.”
But he believes that when it comes to using passive funds to access global opportunities, the most important decision is where to invest.
“Whether you’re active or passive won’t make as big a difference to your portfolio’s performance as to whether you’ve actually got the call right on getting the right global opportunity,” explains Mr Darbyshire.
Old Mutual Global Investors’ John Ventre, portfolio manager of Old Mutual Spectrum funds, also observes that the best stockpicking opportunities may not always be in the best markets.
“Emerging markets are a value story right now and it’s the big benchmark names that are driving and creating that value,” he continues, “so we think that if you’re going to play the value recovery, you need to own the big benchmark stocks.
“That means the scope for active management to add value in that asset class right now, relative to the benchmark, is quite limited, so some of those recovery names we’re bullish on we think are best played passively.”
Ellie Duncan is deputy features editor at Investment Adviser
EXPERT VIEW
Chris Darbyshire, chief investment officer at Seven Investment Management, considers the best markets for passive investing:
“If we’re talking normal passive [investing] where you’re just trying to match a benchmark, on the whole the more developed countries with bigger, more liquid stockmarkets will give better results. There will be more tracking vehicles available, which will keep the costs down. It’ll also be easier for them to track, which keeps the tracking error down.
“Then vice versa, the less liquid markets will probably experience more trading frictions; they’re harder to track, the costs are higher and you’re probably going to have more tracking error.”
