Combination of strategies – best of both worlds.
by Hakan Sesle, Marcuard Heritage, published in Citywire Switzerland September 2020 magazine.
The debate about passive versus active management is a longstanding one, and arguments for and against either of the approaches, such as costs, liquidity, replication or tax issues, are well-known. The fact that active managers have rarely outperformed passive ones in recent years is only true when looking exclusively at returns.
Although specific situations may call for one or the other, a combination of active and passive strategies seems to be the optimal move.
One should not forget that it’s not only about performance but also, more importantly, about risk management. Active funds have risk management objectives in addition to the aforementioned return ones, while ETFs do not, and are largely buy-and hold strategies.
At Marcuard Heritage, the investment process and selection of the investments are not only driven by those arguments, but also by questions of style and approach of the underlying mandates or strategies. As we offer relative return and target return mandates, we have to understand and constantly follow the underlying goal. In most cases, we have found that a combination of active and passive strategies is appropriate, but when it comes to the
relative strategies, we are predominantly using passive investments, especially in equities. ETFs are an easy and fast way to get exposure to markets that are accessible and efficient, when you have a clear benchmark. We foucus on cost-effective solutions, although we do not just look at the expense ratio but also at the bid/ask spreads. Checks to spot potential portfolio inefficiencies, which lead to different NAV and ETF market prices, and checks regarding the replication style are additional steps in the selection process.
Although we are aware of the flows into bond ETFs, we prefer to play that asset class, by and large, through active management. The nature of the credit see a lot of potential for outperformance, especially on a risk-adjusted basis.
When it comes to our target return mandates, risk management is of paramount importance. Knowing your risk budget and planning your strategy and investments accordingly is a key factor. Nevertheless, ETFs, or passive investments in general, can and do play a role when it comes to the selection process, but weightings are lower than those of relative strategies.
As the debate matured over the years, it has become clear that rather than choosing between the two approaches, investors should consider which is most appropriate or the other will prevail. However, in most cases, a combination of active and passive strategies makes sense.