An active approach to passive investing yields best returns

The global economy is extremely volatile at present. The America-China trade war continues to create economic fissures, while uncertainty persists around Brexit, and global growth continues to slow. 

With uncertainty the new normal, the status quo can and often does change quickly. But that creates opportunities for active investors to generate alpha and beat the market, doesn't it? Apparently not as much as you'd think...

Despite the prevailing market dynamic, where active investors who can spot the opportunities stand to make significant returns, passive investing hit an all-time high in 2019.

In fact, the passive investment market in the US achieved parity in AUM with active funds in May 2019. It's a significant milestone. The trend correlates with the growing desire by investors to find low-cost investment options and seek out real returns in the prevailing low-growth environment.

But does it signal a tipping point in the investment strategies of savvy investors? Rather than a revolution, we believe this trend signifies an evolution in investing; one that mirrors the contrarian approach that Stonewood has advocated since its inception in 2011.

Our value-orientated investment strategy seeks to protect and preserve client capital because we believe that a significant portion of investment outperformance comes from avoiding losses. That's why our first rule of investing is “don't lose client money”. It's also our second rule.

We see the value in a blended strategy, where passive investments play a significant role in the portfolio to bring down the costs of implementing the strategy, while still giving us market investment exposure.

However, our conviction for passive investing doesn't mean we sit back and become passive investors. Far from it, in fact. Those who sit back and trust that an inactive passive long-term approach will effectively ride out the dips by capitalising on the market swings aren't playing the game properly. We believe that selecting good underlying investments and stocks and identifying the correct active asset managers makes for a compelling risk-adjusted investment.

Active investors who pay attention to the market while leveraging passive investments will emerge winners in the current unpredictable market. And this proactive approach to passive investing is embodied in our Stonewood Global Adventurous Fund.

The fund's active asset allocation strategy seeks to generate a targeted return over the medium to long term by investing in a portfolio of exchange traded funds (ETFs), low-cost index funds and selected active fund managers that enable the targeted asset allocation to be achieved at relatively low cost – TER including underlying funds is less than 1.0%, and is even lower for larger pools of capital. 

But it's the fact that this asset allocation strategy is flexible that creates the greatest value for clients. We vary the fund's equity exposure between 20% and 90%, depending on the market. We firmly believe that equities remain the proven way to create long-term wealth as they consistently deliver the highest returns over time, but sometimes, like now, equity market valuations indicate that future returns may well be subdued.

The suggested investment time horizon of our equity-biased unitised portfolios are seven years or more. However, we offer weekly liquidity to investors. The aim of these strategies is to maintain a moderate to high risk level, with a medium to high risk of a significant capital drawdown over the investment time horizon.

Of course, returns and risk go hand in hand, but with an active management approach to passive investing, risk does not necessarily equate to volatility. Ultimately, our value-orientated philosophy, which blends active investments with active decision-making in our passive investments, enables higher conviction and higher position sizing to reduce the risk while improving returns for our clients. It's what we believe is the best approach in the current market.

By Eldon Beinart, CEO of Stonewood Capital