Cost control
A central feature of passive investment products is they tend to have lower fees than actively managed funds.
Such cost reasons are central to why Gwilym Satchell, multi-asset fund manager at Invesco, believes in blending active and passive strategies.
He says including some passive investments in a multi-asset portfolio means the overall level of charges will be lower.
Mr Satchell says: “Blending the two makes sense to bring the overall cost down. Passive products are attractive for lowering costs and gaining asset class exposure.
"If financial markets become slightly less directional it is worth paying for alpha to help generate positive returns in an environment when broader asset classes are struggling to make progress."
According to him, this diversification of return streams is worth paying for in the context of a broader retirement portfolio and will ultimately help protect income streams.
Karl Craig, investment manager at Canaccord Genuity Wealth Management, agrees that awareness of costs is clearly an important consideration when taking a long-term approach to investment management and retirement planning.
However, he says this is not enough to make him select only passive investment products.
He says: “In our multi-asset portfolios, third-party fees and charges will act as a drag on performance and so as investment managers we are keen to only employ those funds/investment trusts/ETFs we assess as offering the best value for money.
"There are some sectors/themes and geographies where passive strategies are absolutely the right approach.
"But there are other areas or styles of investment where the right active managers can be seen to consistently outperform.”
James Klempster, investment director at MGIM, says choosing to have a major allocation to passive investment products can prove to be a false economy.
He says: “While there can be a role for both passive and active, passive strategies that are chosen for reasons of low fees may actually cost the client.
"This is because, a good active manager in that asset class should be able to deliver returns that are higher than the difference in fees.”
Liquidity
Add to this the ongoing problems of liquidity. William Buckhurst, investment director at Vermeer Partners says he “worries relentlessly” about the waves of cash that have been placed into relatively illiquid asset classes by passive investors.
He says the consequence of a sell-off within the asset class could be that investors would struggle to get their cash back.
John Roe, head of multi-asset funds at Legal and General Investment Management agrees that, for some asset classes, passive investing is “problematic or even impossible”, such as illiquid asset classes like property or high yield bonds.
With this in mind, it will be vital for advisers to consider exactly how to structure portfolios for retirement, and whether it is possible to blend active and passive strategies within a multi-asset portfolio to overcome the various issues outlined.
