Passive strategies lull investors, says Momentum

Passive funds are increasingly luring investors into a sense of false security, according to the latest report from Momentum Global Investment Management.

In a survey of 40 wealth advisers carried out by Momentum and Scorpio Partnership, 50% of wealth managers added a passive solution to their client portfolios in early 2011.

However, problems for investors arose in niche areas such as credit and commodities, where passive solutions are often no cheaper or more expensive than active ones, according to research.

Christopher Mahon, head of investment strategy at Momentum, says: “Too often the active versus passive debate is dominated by active and passive managers on opposing sides.

“They can hardly be blamed for a bias towards their own style of management but we hope this report [will] give investors a more rounded opinion on the issue.

“Passive solutions work better in mainstream asset classes. In more niche areas passive solutions can be expensive or come with hidden drawbacks.”

While passive solutions targeting mainstream equities and bonds are more likely to be cheaper, the report by Momentum and Scorpio specifically highlights high yield credit as having the potential to prove more expensive.

Alternatively, developed equities, emerging equities and government bonds were all found to be cheaper when passively managed than actively.

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