During our Conference Call with Fund Professionals, we had the honor of inviting three guests who each represent different ends of the investment spectrum:
- Olga de Tapia, Head of ETFs Sales at HSBC Global Asset Management who discussed passive investment strategies
- Ben Ritchie, Head of European Equities at Aberdeen Standard Investments who presented a compelling argument for actively managed investment strategies
- Spyros Agrianitis, Head of Fund Selection at Alpha Bank, who discussed his framework for how to decide which strategy, or combination of strategies, will drive portfolio performance.
The investment community often depicts a dual-like relationship between passive and active investment strategies, with each looking to gain a larger slice of the pie from the other. What our three professionals demonstrated during our Conference Call is that, similar to how investors look to diversify across asset classes, markets and industries, passive and active strategies can offer the diversity investors are looking for to increase the resiliency of their portfolios.
Below we highlight the main arguments and insights put forward by our three speakers during the call.
Passive Investing with Olga de Tapia, Head of ETFs Sales at HSBC Global Asset Management
There is no denying the tremendous growth of ETFs over the past decade, says Olga. However, much of this growth has been in the equities ETF space, and not in fixed income. The fixed income market, as a whole, is nearly 8x as large as equities, so Olga believes many of the opportunities and much of the growth within ETFs going forward will be in fixed income.
When ETFs were not as sophisticated and widespread, they were mostly used as satellite, or tactical investments, in order to quickly gain exposure to an asset class without a large exposure to risk. As fees have continuously been compressed in the ETF space, Olga points out that investors are now massively starting to use ETFs for core investments and long-term exposures to equities and fixed income.
ETFs can also be strategically used to access specific markets or industries that are traditionally hard or limited to enter into. Thematic investments are a great example for the use of ETFs, and can also allow investors to benefit form larger macro bets, where whole industries or sectors are likely to deliver superior performance.
The liquidity of ETFs allows them to be used as a cash alternative for investors looking to remain fully invested in the market while maintaining a cash-like buffer.
Olga also highlights that fixed income ETFs have essentially democratized traditionally inaccessible asset classes, such as government bonds. What was previously reserved for institutional and large-scale investors, can now be accessed through one simple trade, and can provide exposure to a basket of government bonds.
Active Investing with Ben Ritchie, Head of European Equities at Aberdeen Standard Investments:
Ben began by reiterating that he believes there is certainly a role for active management to play in investing, but that he views it as ‘a piece of the pie, rather than the whole pie’.
The discussion between passive and active investment strategies comes down to a classic disruption story, says Ben. ETFs entered the market and offered investors a product that met their needs at a fraction of the price of traditional investment products. This forced traditional fund managers to rethink their model, and adapt their products and services in order to provide a compelling value proposition to customers, which can be in terms of returns, costs, and services, or stewardship. If managers did not adapt and innovate, all investors would simply flee from them towards the much cheaper ETFs.
What allows active fund managers to provide added value, says Ben, is the inherent inefficiency of markets. Within the complex analysis of securities and markets, he still believes there is opportunity for investors to exploit market mispricings and inefficiencies through what he calls an informational advantage. This informational advantage is achieved through the deep research and analysis on individual companies, since the entire investable security space is far too large and complex for analysts to develop a complete understanding of, resulting in missed opportunities.
The other factor that allows for active managers to deliver performance is the psychological effect on investment decision-making. It has long been known that human behavior and emotions plays a large role in the driving market cycles, with investors shifting from over-optimism to over-pessimism. The behavioral aspect of investing demonstrates the inefficiency of markets, and provides active managers opportunities on which to capitalize.
Combining strategies with Spyros Agrianitis, Head of Fund Selection at Alpha Bank:
Spyros, as an investment professional whose duty towards his clients is to provide the most appropriate investment strategy that meets their needs, whether that is through a passive strategy, active strategy, or both, opts to look at the active versus passive debate through a more detailed set of questions that can form a sort of framework to help in deciding when to choose a passive and when to choose an active strategy.
The five pillars he identifies as critical to his role as a fund selector are: the market characteristics and technicals; the product availability and quality; the type of service performed; the house view; and the client profiles. By taking a holistic approach to wealth management, instead of the narrow fund selection perspective, investment professionals can use these five pillars as guidelines to help direct their decision-making.
When reviewing the market characteristics and technicals, Spyros suggests asking questions like ‘Is it a bull market or not?’, ‘Is it an efficient market?’, ‘Are correlations within an asset class or amongst asset classes high or low?’. Answering these questions will allow the investor to develop an appropriate view on the current market, which is only one factor to consider when assessing which strategy to opt for.
The type of service being performed is also a key factor in deciding the investment strategy. ‘Is it advisory?’, ‘Is it discretionary?’, ‘How do you deliver your service?’. As Spyros says, a general guideline can be that active products better fit investing activities, that is medium to long investment horizons, whereas passive products better fit trading activities, or short to medium investment horizons. Guidelines are not rules, and each client can differ in their objectives and needs, so Spyros reinforces that investment professionals must adapt to accommodate these changing needs.
Client profiles alone can often dictate which strategy to choose. Differing objectives between retail, mass affluent and high net worth clients determine cost sensitivity and risk tolerance, which can in turn determine the strategy. Are investors looking to achieve capital preservation, or actively seeking returns? The multitude of questions that need to be asked answered may seem repetitive and time-consuming, nevertheless indispensable when making investment decisions.