In Focus: Passive Investing  

Why multi-passive portfolios can work for clients

  • To understand why people might want portfolios of passives.
  • To be able to explain how to construct a multi-passive portfolio.
  • To know how to manage allocations to help meet clients' goals.

He explains: "Since Mifid II and the requirement to have conversations with clients surrounding costs, certain frailties within the financial construct have been exposed, specifically in regard to transaction costs of actively managed funds.

"IFAs have to disclose the costs of all fund managers, as well as their transaction costs, which has caused some surprise to both advisers and clients, in terms of the size of the percentage figure."

This has led to a wider use of passive investment vehicles to reduce costs of overall portfolios. Tomaszewski adds: "To gain exposure to some of the more ‘efficient’ stock markets, where information is ubiquitous and widely known, advisers have been using passive investments as the additional value of using actively managed funds can be relatively small."

To him, this is why the use of US, UK and European passive investment vehicles has increased, while the use of actively managed funds in stock markets and economies in historically more "opaque nations" is still popular.

And while some people still argue for active management, Debru counters the active versus passive argument by explaining how ETFs can work well in a multi-asset portfolio. He says: "Some people view ETFs as a vehicle to deliver only delta-one exposure to large market cap indices.

"This erroneous view creates this fake debate between ETFs as the passive investment and mutual funds as the active investment. This is no longer the case.

"Nowadays, ETFs offer a full spectrum of market exposures, from market-cap-weighted investment to active or thematic strategies that used to be the sole preserve of mutual funds through the halfway house of factor investing.

"Therefore, investors use ETFs in every corner of their portfolios."

Keeping it low cost

Lower cost is the first and foremost argument put forward for the use of passive funds within a multi-asset portfolio approach. Sanlam's Cowen explains: "There are times when macro dominates and bottom-up selection is drowned. In this situation, few active managers outperform.

"Why pay up for active at such times, when the chances are high that detailed analysis may be unrewarded in the short term? At other times stock selection can add a lot of alpha. At such times we dial down exposure to index."

David Hsu, senior equity index and ETF product specialist for passive fund giant Vanguard, says the company believes investors have the best chance of success through holding broadly diversified portfolios, at a low cost, for the long term.

And as a foundation stone, he says: "ETFs are a great tool for constructing these kind of portfolios."