When considering the many managed portfolio service (MPS) options in the market, one feature to look at is the overall investment approach or strategy. Whether active, passive, blended, or agnostic, the investment strategy significantly impacts financial outcomes for a portfolio.
Investment strategy also impacts the risk profile of models within an MPS, so it is essential to consider when determining client suitability.
In this blog, we’ll delve into the core distinctions between active, passive, blended, and agnostic investing to help you to make informed choices about the methodology that’s right for your clients.
Active investing: The proactive approach
Active investing requires a hands-on approach from fund managers who proactively buy and sell assets with the aim of outperforming the market. An active MPS also requires a proactive management approach to ensure the funds selected are performing as expected and asset allocation remains in line with the risk profile for a given model over time.
Active portfolio managers rely on their own expertise, research, and market analysis – as well as that of the fund managers they invest with – to make real-time investment decisions based on the information available at the time.
Due to the level of research and proactive portfolio management required, active investment often carries higher management fees. This is also a result of the higher number of transactions (and associated fees) to be expected from the actively managed funds they invest in.
This type of investment opportunity is more suited to investors who can tolerate short term dips in investment value and understand the risk/reward relationship of equity-driven portfolios over the short, medium, and longer term. While the potential for returns is great, especially in times of volatility, actively managed portfolios are more susceptible to changing market conditions, world events (like wars, pandemics, and extreme weather), and poor decision-making/human error – both of which can lead to significant losses.
Passive investing: The ‘set and forget’ approach
Passive investing aims to replicate the performance of a specific market index, rather than trying to outperform it. To achieve this, portfolio managers will often use index funds or exchange-traded funds (ETFs) which track market indices and aim to match their returns.
Unlike an active strategy, the expectation for a passive portfolio is that it won’t need much tending to once the initial research and fund selection has taken place. Assuming all goes to plan, the portfolio manager can set up a diversified portfolio and, for the most part, leave it to grow over a long-term time horizon.
This focus on long-term investing helps to minimise transaction costs, but passive portfolio managers must still keep an eye on the models within their MPS – asset allocation is continuously monitored, and underlying holdings changed as required to meet investment targets and maintain risk levels.
Returns for a passive investment portfolio will likely be lower than the highs that can be reached through active management, particularly in the short term. However, the risk is also reduced as a result of fewer trading decisions, investment in less volatile funds, and lower overall fees. This can be a good choice for investors who aren’t able to tolerate short-term dips in the value of their investments.
Blended investing: Finding the middle ground
Blended investing combines elements of both active and passive strategies in a single portfolio – managers will seek to diversify investments across both actively and passively managed assets. As the name suggests, the overall investment pot must be a blend of the two types of fund.
Blended strategies aim to capture market upside while mitigating some of the risks associative with purely active investing. This requires tactical asset allocation, as portfolio managers actively adjust the balance between active and passive components based on market conditions.
The costs associated with a blended investment service can vary depending on the allocation between active and passive strategies. If the balance is weighted toward more active management, there will likely be more buying and selling (and so more transaction fees). Management fees tend to be higher than a passive service due to the increased need for proactively managing the portfolio.
By combining investment approaches, a blended portfolio will have an anticipated level of risk and return somewhere between the two. The risk profile for a given model (if designed to meet a set risk level, as most are) should largely remain the same over time, with portfolio managers adjusting asset allocation in order to maintain a set level.
Agnostic investing: A dynamic approach
Agnostic investing takes an even more flexible approach, with managers allocating assets based on the prevailing market environment, rather than adhering to any one fixed strategy. Managers who adopt this approach aim to optimise risk and return based on current market dynamics.
Agnostic portfolios adapt quickly to changing market conditions. Due to the cyclical nature of markets, there tends to be times when one approach is more effective than others.
With an agnostic strategy, portfolio managers can change tactics to whichever is most appropriate at a given time, maintaining the flexibility to adjust positioning in light of prevailing market conditions at a given time. Agnostic portfolio managers rely on continuous research and data analysis to make informed decisions. Because of this, most successful agnostic services are also quantitative.
Similar to a blended portfolio, fees can fluctuate depending on the allocation of assets. Likewise, the risk and return will differ depending on the make-up of the overall portfolio – strategic asset allocation is required to ensure models within a managed portfolio remain within set risk parameters over time.
Active, passive, blended, and agnostic investment strategies each have their own merits and drawbacks. The right choice depends on your clients’ investment objectives, and risk tolerance.
The diversified managed portfolios that make up our Core and Sustainable MPS ranges all follow an agnostic investment strategy, with quantitative fund analysis and selection methods helping the portfolio managers to make better-informed decisions. At the heart of the service is a commitment to logic, process, and data-led decision making.