Expensive markets and the prospect of higher volatility mean it will be difficult for passive funds to beat actively managed products in the years to come, according to James Burns, co-head of the managed portfolio service at Smith and Williamson.
Burns uses both active and passive strategies in the portfolios he manages, but says the focus should be on finding: “the best solution for the time we are in”.
For much of the decade between the end of the financial crisis and the start of the global pandemic, both bond and equity markets generally rose in value from the lows of the immediate crisis period, and passives performed strongly.
But Burns says that with markets now looking expensive and having swiftly recovered from the immediate lows of the pandemic period, and with considerable uncertainty about the direction of economies and inflation: “It will be hard for passive funds to outperform against the best active funds, which can be flexible and the opportunities that arise in the years to come.”
John Leiper, chief investment officer at Tavistock, says he aims to use a “hybrid” of both active and passive strategies, and that one of the advantages of using passive strategies is that an investor can get very focused exposure to a particular theme.