Active or passive? Art or science?
10 August 2017 | Portfolio construction
How do you choose between active and passive? Is it art or is it science? Is it really one or the other?
Determine the right blend for your clients |Active/passive framework
My name is Andrew Surrey and I work at Vanguard.
Our framework for the active-passive choice offers advisers and their clients a process to help them decide the blend of active and passive in their portfolios. And like the rest of your advice process, this framework is a process that is structured, repeatable and defendable.
Many people approach this decision thinking the outcome is either one thing or the other. You either expect your manager will outperform or you don't. You go 100% active. Or 100% passive.
But in reality, there are many factors to think about. We have expectations about outperformance; the style of the fund; the mandate; the cost; the manager's experience and skill. The list goes on.
But can you combine all these factors, and weight them so you know the right mix of active and passive? Without a structured decision-making process, you're making implicit assumptions about what's important and how important it is. Making the decision is more of an art. It's subjective. And that's not wrong. But it does make it difficult to ensure that you can repeat the process for different clients, their different circumstances and at different points in time.
Vanguard's framework takes a more scientific approach. Based on real data, we've identified four critical factors – expectations about a manager's ability to generate alpha; the cost of the fund or strategy; the risk the manager takes; and your client's tolerance for that risk. Using this framework, you and your clients can be explicit about the decision-making criteria. And from this, you can determine the right mix of active and passive for your client's portfolio.
You can now have a structured, repeatable and defendable process for that previously opaque element of portfolio construction – blending active and passive.
Thank you for watching.
This video is directed at professional investors and should not be distributed to, or relied upon by retail investors.
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This video was produced by Vanguard Asset Management, Ltd. It is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.
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The opinions expressed in this video are those of individual speakers and may not be representative of Vanguard Asset Management, Ltd.
Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.