By John Eckstein, CIO, Astor Investment Management
As the investing public, from institutions to individuals, moves away from stock picking and other traditionally active strategies, the beneficiary is passive investing.
As the Wall Street Journal reported recently, pension funds, endowments, 401(k) retirement plans, and retail investors are opting increasingly for passive investing that tracks an index.
For the three years ended Aug. 31, investors added nearly $1.3 trillion to passive mutual funds and passive exchange traded funds (ETFs), while taking more than $250 billion from active funds, according to Morningstar.
Passive investment products can be powerful tools. But so is a chainsaw. In both cases, you need to know how to use them.
Passive investing may be appealing to some investors compared to traditional active investing such as stock picking, which is inherently difficult.
Investors who want to track market performance often prefer passive funds as a way to capture “beta” at a lower cost than active funds. In addition, traditional active funds often underperform their benchmarks.
Being too passive in one’s investing, however, is no panacea. For example, in a market downturn, a passive approach that “stays the course” through a correction in the broad market or a particular index can lead to significant drawdowns.
Another consideration, in our opinion, is that many passive index funds are market cap-weighted, with the biggest allocations going to the largest stocks in the index. That might lead investors to have greater exposure to a few stocks than they anticipated or desired.
A much better approach, we believe, is to focus on asset allocation. As a classic 1986 study published in the Financial Analysts Journal found, the potential return from “investment policy”—meaning, the selection of asset classes and how they are weighted—is the dominant determinant of portfolio performance. Investment strategy, such as picking particular stocks, was found to be much less of a determinant of performance.
At Astor, our fundamentally driven, macroeconomics-based approach focuses on asset classes—such as core equity holdings, fixed income, commodity, currencies, or real estate. We believe ETFs, which are low cost, transparent, and efficient, are the best instruments to provide this exposure. Moreover, we take a dynamic approach to asset allocation, as determined by the current trend in the U.S. economy, using our proprietary Astor Economic Index®.
We believe that when investors take a dynamic approach with a strategic holding (for example 20 percent of their overall portfolio) they can potentially gain the benefit of being more agile and responsive to economic conditions.) This is our approach to a ‘best of both worlds” strategy for being both passive and active, as advocated by some investment professions in the Wall Street Journal.
At Astor, by putting our focus on asset allocation and with a finger on the pulse of the economy, our goal is to generate solid returns and mitigate risk, across the economic cycle.
All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information.
The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points: including output and employment indicators. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® is not an investable product. When investing, there are multiple factors to consider. The Astor Economic Index® should not be used as the sole determining factor for your investment decisions. The Index is based on retroactive data points and may be subject to hindsight bias. There is no guarantee the Index will produce the same results in the future. The Astor Economic Index® is a tool created and used by Astor. All conclusions are those of Astor and are subject to change. 310161-511