Active v passive

When it comes to most things in life, the talk is usually about being more active, more engaged - not just sitting back and accepting the status quo. However, you might be surprised to learn that when it comes to investment management this active approach is not always to the forefront of people's minds.

There is a long running debate on the merits of active versus passive investment management, with constant new studies utilising all manner of facts and figures to support various viewpoints and arguments. However, is active versus passive the real question? Perhaps it is more appropriate to ask: "How active are you going to be?"

Firstly, an active approach to investing is unavoidable. Even where a passive fund is ultimately chosen, an active decision must be made to arrive at that juncture. Studies show that the asset allocation decision is the biggest determinant of investment returns; yet it is often not considered an active decision. Active management is more than just pure stock selection. For example, even if an investor decides to gain exposure to say, Irish equities, through a passive index tracking fund, there are a series of conscious active decisions that had to be made before arriving at that point.

In its simplest form, an investor made the active decision to invest, seek advice, pick an asset class and pick a region. They did not passively 'arrive' at the decision to gain exposure to an individual passive equity fund. This is often overlooked in the active versus passive argument. At Zurich, we are firm believers in a top-down active asset allocation thesis that drives our investment decisions. We don't believe in settling for an average market return over the lifetime of an investment. By passively investing in an index you are accepting that you will never return more than the market, not by even a fraction of a percent each year.

However, the power of compounding amplifies the benefits of consistent outperformance that a quality active manager can provide, whether it is through superior asset allocation, stock selection, or a combination of both. For example, if you had €10,000 invested earning 5% per annum versus 4% over 20 years, the difference would be worth over €4,600, or 46%, to you. Of course this won't always happen - and there are other considerations - but the principle remains. A fund that outperforms consistently, even marginally, over the long-term is potentially of great benefit to an investor.

We all have a responsibility to be active when it comes to providing financially in our later years. Pension scheme members need to review their contribution levels regularly to ensure they are putting enough away; and that it is working hard for them once they do. Indeed, many people seem to agree: a recent survey from Zurich found that three in four people felt that they themselves have the most responsibility to provide for their retirement.*

Scheme trustees also have a duty and need to be active in ensuring that their scheme members are getting an appropriate return for the level of risk across their portfolios. It is important that members regularly evaluate their financial plan and check in to see how their investments are performing because it could be an appropriate time to review their contributions levels to ensure that they are doing enough. Now is the time to ensure we are all being active with our investments.

*Zurich B&A Survey, August 2016.