Why multi-passive portfolios can work for clients

Back in 2013, Cass Business School ran an extensive study, commissioned by Aon Hewitt, to explore the make-up of indices and whether alternative approaches to index creation would be better for passive investors.

Cass developed an algorithm based on the 'infinite monkey theorem' to study whether 10m 'monkeys' (random computer-based managers) could beat a standard market-cap-weighted index over a 43-year period. 

They did. Every single one over every single year, as the article "Meet your new stockbroker" explains.

This research helped set the groundwork for product manufacturers to work with index providers to create non-traditional indices, whether equally weighted or screened or inclusive, as a basis for passive investors to track an index but not necessarily the performance of a few index giants. 

And ETFs, with their greater flexibility and ability to track a basket of physical or synthetic stocks, as traditional or esoteric as a client's risk profile allows, can provide clients with a lower cost way of getting diversification without ramping up the risks or at the mercy of sector giant performance. 

Therefore, building a multi-asset portfolio using passive funds such as ETFs can make a lot of sense for investors. Certainly the choice is there, although, as always, it depends on the client and their needs. 

Tomaszewski adds: "An interesting trend with my clients has been the desire to start investing small amounts of money under their own leadership/jurisdiction."

According to him, the pandemic and thus the consequential lockdowns provided inexperienced investors with more time to conduct their own research into investment opportunities.

"Although the additional time provided these people with the ability to research areas or themes which interest them, it did not necessarily lead to specific active fund research.

"I found this specifically with clients who tilted towards a ‘sustainable’ mindset with their investments and a noticeable increase in clients who bought passive investments from their own research."

And, with the volatility seen in stock markets over the past 18 months, which has permeated into their passive investments, Tomaszewski says this has "materialised into many clients discussing the possibility of translating their passive investments into more actively managed portfolios, once they realise the passive investments may not align with their financial tolerance towards risk but to their short-term emotional tolerance to volatility."

simoney.kyriakou@ft.com