Even With Shift To Passive Management, Active Strategies Matter

A new report has found that active investment portfolio strategies, seen as necessary to generate higher yields in a low interest rate era, remain a bedrock approach for advisors as passive investment strategies attract more retail investors.

The 89-page report, titled “Financial Advisors and Key Trends in Portfolio Construction 2015,” said that advisors look to liquid alternatives, “smart beta” products and actively managed exchange traded funds (ETFs) to round out a quiver of active investment strategies.

Howard Schneider, president of Practical Perspectives and co-author of the report, said in a news release that advisors have “a growing range of options” when it comes to actively managing client assets.

“The challenge for product providers and distributors is to drill beneath the broad patterns and understand to what extent advisors are really changing their stripes as far as passive management, liquid alternatives, smart beta and actively managed ETFs,” Schneider said.

The survey polled more than 600 financial advisors, investment representatives and industry executives.

Liquid alternatives include investments other than stocks, bonds and cash that can be traded and are therefore liquid. ETFs are an example of a liquid alternative.

Smart beta investment strategies lie at the intersection of active and passive investing with the goal of beating the market using a “rules-based, transparent, low-cost approach,” according to Research Affiliates.

As a rule, actively managed portfolios depend to a greater extent than passive portfolios on the skill of individual advisors. But active strategies also incur higher fees and costs as advisors trade in and out of positions.

By contrast, passive strategies seek only to match a benchmark and don’t require as much effort on the advisor’s part. Passive strategies cost less because they require less trading. Lower costs associated with passive investment often make up for gains notched by active strategies.

Experts often recommend a passive strategy for long-term retail investors because it is so difficult to outperform the market over the long run. But active strategies may be more appropriate for investors looking to reach a specific near-term goal — boosting returns within a fixed-income portfolio, for example.

The Practical Perspectives survey also found that more than half of advisors polled have not shifted their relative mix of actively managed and passively managed investments in the past year. The survey also found that advisors who have changed their relative mix were more likely to have boosted their allocation to passively managed investments.

More than 90 percent of advisors use liquid alternatives as a way to diversify a client’s investment portfolio.

The survey also found that fewer advisors use smart beta strategies compared with liquid alternatives since advisors are unclear whether smart beta represents an active or a passive investment approach.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at cyril.tuohy@innfeedback.com.

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at cyril.tuohy@innfeedback.com.