Fidelity’s investment solutions group, which manages the firm’s multi-asset and multi-manager funds, has reignited the active versus passive debate in its latest strategy note, Clockwise.
Rather than supporting one strategy or the other, investment director Steven Edgley says both are important in portfolio construction and the boundary between them is not always clear.
Edgley sees long-term strategic asset allocation as an active investment decision in itself, which can add value. Even if asset allocation decisions are played out only through passive investments, there is still an active element to the end portfolio.
Many active managers fail to outperform their benchmarks after charges but Edgley believes those that produce just 1 or 2 per cent over a benchmark can make a big difference to returns.
But passive investments can be useful where the chances of producing above-market returns are at their lowest, such as where markets are efficient. Passive strategies may also be preferred for short-term tactical positions where the time horizon is too short for active managers to produce decent returns.
Edgley points out that the costs of passive investment are often overlooked, not only in terms of direct charges but also the lost opportunity for above-market returns. In his view, active tactical asset allocation can protect against market declines and periods of extreme panic better than a passive strategy that cannot react to changing market conditions.
He says: “Active management should be used where and when it has the best chance of success and passive strategies used to round out the asset allocation where appropriate.”