Investment Model Portfolios for Adviser Firms

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Active Investing, in Passives

The active versus passive investment debate is one that has endured for a long time, dating as far back as Harry Markowitz’s work on Modern Portfolio Theory nearly 70 years ago. In the summer of 2011 GDIM launched Passive Investment Model Portfolios, and at that stage we struggled with including the word ‘passive’ in the portfolio names. Although they are populated by funds that track equity and bond indices, our actively managed and regularly reviewed ‘passive’ portfolios are analysed and scrutinised in the same way as our Whole-of-Market portfolios, which use both active and passively managed funds, so the moniker does seem to be somewhat incongruous. Both strategies have merit and can be used effectively together both in mixing active and passive funds within a portfolio and by proactively managing passive instruments.

There are, of course, fixed allocation multi-asset passive funds that are available in the market but these funds tend to be market-cap weighted. While this is a simple way to allocate, there are times when the largest markets will not be the best performers and we therefore pivot our exposures to areas where returns may be more attractive – Yesterday’s winners may not be tomorrow’s. Similarly, we will often position more defensively than the overall market and so would favour less volatile regions or assets to mitigate the effect of swings in market values.

Perhaps the most obvious attraction of passive funds is their low cost. Our passive portfolios usually have an Ongoing Charges Figure (OCF) between 0.14% and 0.17% (before fund management fees and platform costs) which makes them very competitive amongst peers. This is one of the key drivers motivating investors to select our Passive portfolios, but there is also an ideological aspect to this method of financial planning. Many believe that the efficiency of stock markets will produce the correct value for any given index and that investors only require a broad exposure to these in their portfolios. As an extension to this, we add in an element of alpha by aligning these with our macro-economic views in terms of regional, sectoral and risk allocation.

In the time we have been running these portfolios we have chosen to add in additional elements such as technology and property into our equity exposure and shifted the average duration (interest rate sensitivity) of our bond component by adding in short-dated credit at various points.

Our Passive Investment Model Portfolios have excelled at various points and regularly beaten their respective benchmarks. Having all of the benefits of passive investing, including broad levels of exposure and low costs, but with the watchful eye of active management overlaid, we believe that these portfolios provide a compelling proposition.

Tom Sparke GDIMTom Sparke IMC CertPFS (DM)
Investment Manager | Associate Director