Opponents of active management claim that the results do not outweigh the costs, and many traditional actively managed products may prove their point. However, the proliferation of ETF variants, which allow sector, region, or factor exposures, has created a low-cost, active management niche. Even key voices at Vanguard, one of passive management’s iconic institutions, believe there is a place for active management. Tom Rampulla, managing director of Vanguard’s Financial Advisor Services division, recently said there is a place for active management of portfolios, primarily in applying ‘tilts’ based on factors such as volatility and income in single factor and multifactor portfolios.1 Advisers seeking to adopt an active approach should consider whether their limited resources are best spent researching individual company investments, investments that focus on top down macro drivers of risk and return, or finding portfolio managers who are effective at either approach.
Ideally, an investor’s investable assets should be a mix of passive and actively managed vehicles. Whatever the implementation, I believe investors should place more emphasis on managing total portfolio risk and controllable factors, such as fees and trading costs. During the portfolio construction process, the focus should be on the key drivers of risk and return: whether that means market beta, smart beta, or specific security level risks. A forward-looking view and an understanding of the premia awarded for incurring these risks is crucial. Assessing and monitoring these risks effectively should not be a passive exercise, so investors need to be actively engaged or find a portfolio manager who is.
Palladiem is the advisor-centric investment firm; we provide targeted support and insight to advisors. We manage diversified, multi-asset class investment strategies designed to meet a wide range of investor risk/return objectives, supported by our proprietary investment process, forward looking views, capital markets analysis, and alternatives and investment manager research.
1 –ThinkAdvisor January 23, 2017. “Active Management Isn’t Dead, but It’s Evolving”