Can it Pay to be Passive? Paul Roberts proberts@arlingclose.com

Clients know we are steadfast fans of actively managed pooled funds. Employing the use of a professional to undertake a specialised task that you may not have the time or experience to do yourself is often a sensible approach, be it plumbing, pest control, or investing.

However, the debate about whether, on average, active managers offer value for money in terms of generating outperformance, or ‘alpha’, continues and most definitely shows no signs of stopping.

What also shows no sign of stopping is the continued growth in the number and range of passive investment vehicles and the variety of styles that are now available. Those which track large broad market indices such as the FTSE 100 or S&P 500 often attract most investment, but investors can now invest in indices covering such areas as clean energy, healthcare, commodities, transportation, electric vehicles, insurance, as well as a huge variety of investment styles and geographies.

All well and good having that much choice, but more relevant to our clients is the increase in the number of these investments that focus on generating and distributing income.

Rather than a human team selecting a basket of what they consider to be the best, say, equities in which to invest, these products typically track an index devised to filter a broad set of companies (e.g. FTSE 100) into a smaller subset in accordance with a particular strategy or set of rules.

Unsurprisingly for income focused investments, these subsets include filters for high dividend yields, which are then tempered by other criteria including minimum market capitalisation as well as quality and momentum factors, to give what is intended to be a portfolio of high-quality assets able to generate stable levels of income.

In terms of the all-important income returns generated, four investments were chosen for this analysis which focused on either global or UK equity. Over the last 12 months income returns ranged from 3-7%, while on a longer-term basis the annualised income returns over the last five years ranged from a very respectable 3.5-5% with levels of volatility in line with what we have seen in the actively managed equity fund space.

Another positive is that compared to many actively managed funds, the fees for these investment products tend to be much lower, reflecting the more ‘hands off’ nature of the products. However, depending on the investment provider, access to the products may be direct or require the use of a separate platform or custody facility, making them potentially less straightforward to access.

As with all investing, one size rarely fits all and while many actively managed funds still outperform their benchmarks over the longer-term (meaning we remain advocates of this approach), the rise in the number of passive strategies offering investors good-value and easily accessed opportunities to specific sectors or strategies that perhaps weren’t available a few years ago should not be ignored.

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