Passive investing is cheap and transparent, is the motto. However, independent asset manager Tareno believes that an active strategy offers enormous advantages over the passive option. This would allow investors to quickly adapt to changing conditions and focus on solid, high-quality companies.
The arguments in favor of passive investments seem convincing at first glance: low fees, transparency and tax efficiency. "The fact that passive money investment strategies have outperformed their active counterparts in recent years makes them even more attractive. In the financial landscape today, many even argue that ETFs are the best and only option for investors", says Sybille Wyss, Chief Investment Officer (CIO) and deputy CEO. CEO at Tareno. However, a closer look at history suggests that this kind of enthusiasm tends to signal pre-programmed trouble. "The capital market and investment sentiment have always been cyclically driven; there is little reason for them to believe this time will be any different.
Passive investments bring numerous risks
The cyclical popularity of passive investing is not the only reason for caution. Wyss explains, "For example, most experts recognize that equity markets have been among the main beneficiaries of policies that have encouraged unusually low interest rates and volatility. In an environment where the rising tide of monetary opportunity lifts all boats, an index-based strategy can make sense. However, the economic and financial environment is changing." If central bank conditions return to the levels of the past, index investors could find things difficult.
But even if the economic and financial environment stalls in this so-called new normal, the passive approach is not flawless, according to the expert. "It is impossible for such strategies to outperform or even keep pace with relevant benchmarks unless their managers work for free. In addition, they expose their investors consciously or unconsciously to numerous risks. The fundamental factors that affect the share value and ultimately the performance of the companies concerned are largely ignored", says Wyss. "In the event of a price drop, the passive investor is forced to ride the correction, even though it may have little to do with the long-term outlook for company performance." With a passive approach, it is difficult for investors to determine whether the strategy is truly aligned with their long-term financial goals and personal preferences. This approach, they say, is more about averages than individuals, companies, industries and themes.
Active strategies allow customized portfolios
Active strategies, by definition, are not simply a reflection of what the masses are doing. Properly managed, they operate with a clear, structured framework in mind, as the Tareno CIO puts it. This, they say, refers to the elements that define a well-managed company, such as valuations, time horizons and the operating environment, as well as investor needs and requirements. "A tailor-made strategy offers even more advantages. Unlike a passive approach, active investors are able to separate the good from the bad. An experienced and knowledgeable portfolio manager focuses on high-quality companies with solid prospects and focused strategies and avoids those whose prospects are unattractive or overvalued", says Wyss. She also adds that the benefits of active investing are not limited to the aspects of traditional analysis, but also include ESG (environment, social, governance) criteria. Only active managers would have the opportunity to weight such criteria accordingly in the investment decision process.
Profiting from Big Data and accurate analytics
Through active management, investors can also profit from developments that are not obviously driven up by profit reports, headlines and various random noises. Wyss explains, "Take water as an example. While many investors undoubtedly understand their importance, it is difficult for those who do not actively follow developments to identify the clear winners and losers in this space. For example, in the Tareno Global Water Solutions Fund, the investment team spends a lot of time figuring out which companies are best suited to benefit from the megatrends of demographics, climate change, urbanization and technology advancement."
Active management, in contrast to passive management, offers investors the opportunity to adapt and react to changing market conditions and new developments, and to find the right balance between risk and return. It also allows the fund manager to use methods and technologies, including Big Data and artificial intelligence, to optimize investment decisions.
"While proponents of passivity emphasize low fees, they sometimes hastily tend to neglect important quality aspects. This includes, for example, the ability to invest in defensive, high-quality active stocks that promise above-market returns", Wyss emphasizes.