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Active versus Passive

Published on 04/02/2020

The debate has raged for decades, and will in all likelihood continue to decades to come.

Consensus seems to settle in around cost being the primary differentiator and explainer, therefore handing to crown to passive strategies.

The solution, it would appear is paradoxically, for active to become less active.

Let me explain.

The one element of the active world that has grown in total assets under advisement is the quantitative segment. This makes sense, as quant funds are able to operate at a lower cost level, soby proxy become the active-passive strategy.

The response for the rest of the active world, is to double down, and become more active. Thereby driving up costs. So while it is true that transaction costs have been falling over the last decade, the increase in turnover by active managers has partially offset that cost saving in aggregate.

Conviction and concentration over diversification and indifference. Most notable however, is the erosion of alpha. Active managers in our view are able to achieve outsized returns by taking non-consensual, non-momentum driven investments (I stress investment over trade). Yet, rather than do this, the active world has sought to mimic the quantitative world–and is (largely) being beaten at it, and seeing assets fall.

The exceptions to this rule, should be the light to all active investors.

Firms like Fundsmith have made an excellent case of buy and hold. Conviction and concentration over diversification and indifference.

We see an Upside in this shift, we see the ability to bring investors, analysts, portfolio managers together in an ecosystem that allows allocators to create bespoke–fundamental–strategies that will outperform over time.

As long as companies are run by individuals, there will always be alpha for fundamental investors.

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