Charles Stanley CIO: Opportunistic wealth managers should favour passive

Charles Stanley CIO Jon Cunliffe says managers are better served using passive investments when making strategic changes to their portfolios.

Reacting to a report by think tank New City Initiative that claimed the majority of investors could do better by selecting active managers, Cunliffe says passive investments are most suited to short-term bets and exposure to the US market.

“There will remain markets – North America, to name but one – where the cost of active management is rarely justified by the returns relative to a passive investment vehicle,” Cunliffe says. “Elsewhere, managers who wish to be more opportunistic should as a rule favour passive implementation, reflecting lower execution costs and the reduced scope for alpha that a relatively short time horizon affords.”

John Redwood, chief global strategist at Charles Stanley, says passive funds are often superior as they don’t chase trends.

“On average, passive funds usually do better than active funds as they have lower costs and do not make mistakes with sector and share fashions,” Redwood says. “There are good active funds that you can try to identify. It is not a good idea to pay higher active management fees for a manger who in practice sticks close to the index exposures for fear of making a mistake.”

However, Cunliffe adds that a flexible approach is key when choosing passive or active investments.

“This is particularly true in the current environment where the shift to stronger global economic activity has seen correlations between markets and individual stocks within them decline somewhat.  This suggests that in some markets – where manager skill can be identified at a reasonable price – an active approach can be justified.”