Active or passive? Help clients choose their style

Active and passive investments aren’t mutually exclusive, insists a new report by Goldman Sachs Asset Management.

“Just as allocations to the developed and new growth markets, or to equities and bonds, can be complementary, active and passive investments can also serve different needs in the same portfolio,” it notes.

Over the past decade, the report says, investors have increasingly adopted ETFs and other index investment options and have been pushed to go passive.

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And while Goldman admits a passive approach has benefits, there are several variables—such as time horizon and index distortion—investors should consider before making decisions.

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If investors favour an active approach, they’re challenged with determining whether their money manager has the chops necessary to deliver returns.

If advisors developed the skills to effectively define, measure and articulate a manager’s overall performance, Goldman suggests, some arguments supporting passive investing might become irrelevant and more clients would look more seriously at actively managed products.

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“Investors should define active as more than the opposite of passive,” it says, adding they also need to extend their time horizons when assessing the benefits of active management. Otherwise, they won’t get the whole picture of why and how the strategy can work.

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Also, urge clients to consider the costs and risks of passive investing; tracking errors and fees can be significant. (Market volatility and the distortion of indexes can expose them to risk and cause variance drag from down markets).

Going forward, Goldman forecasts a surge in adoption of actively managed investments. Quality companies will stand out more and there will be increased diffusion between high- and low-quality stocks.

Also read:

ETFs evolve into active investments

Active vs. Passive: The new debate

Active management beats index in Q1

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