The asset allocated passives range was designed to provide investors with access to Seven’s tactical long-term views and short-term strategic asset allocation at a lower cost than the existing funds, which invest in actively managed funds. The AAP range comprises adventurous, moderately adventurous, balanced and moderately cautious portfolios.
The asset allocation of these funds will be almost identical to the company’s existing portfolios but ETFs will be used because of their greater liquidity and lower costs. Using ETFs removes the need for Seven to make a charge for selecting underlying managers, so this also reduces the annual management charge. As the new funds grow, the costs will also reduce further as the funds will be able to buy baskets of equities to track indices rather than pay ETF charges. The fixed costs will also become proportionately smaller.
According to Seven, lower costs is not the only benefit of the AAP range. It says the asset allocation will be more precise because ETFs are not guided by human emotions such as greed and fear that lead active fund managers to make their decisions. Active fund managers may decide to invest in cash or they may drift away from their investment style, which makes asset allocation difficult for multi-managers. Passive investments remove these problems, as they remain 100 per cent invested all the time in an index.
AAP funds could be useful for IFAs who are looking to outsouce asset allocation decisions but who are put off some multi-manager funds by the higher total expense ratios. However, they are not a panacea and are not intended to replace portfolios of actively managed funds, such as Seven’s existing funds.
Investors would need to weigh up the advantage of the new funds’ lower costs against outperformance beyond an index that active managers can deliver at a higher cost.