Are Passive Investing Approaches Passive?
Passive investment approaches (often called index investing) have delivered advisors and their clients with a very low-cost exposure to markets (indexes) and as such have been attracting an ever increasing wave of capital. The appeal is easy to see, a one stop low cost shop to gain exposure to a market or index. An easy concept to understand and explain. Coupled with the fact that it is hard to find ‘active’ managers that consistently outperform over the long term and you can see why ETFs are becoming an unstoppable force. *
However, the investment methodology of the Index ETF is often overlooked in the process as price and ease of access become the focus. Most passive approaches use a market capitalisation approach. Increased exposure is given to the largest companies. These indexes are rebalanced periodically (often Quarterly). They invest to a set of rules. They use a systematic approach to managing the index. I would argue therefore that it is a rules based systematic investment approach.
These rules were never originally conceived to be invested with. It is illogical therefore to think that the set of rules that define the Passive Index are the best available. They can be improved and the development of Smart Beta approaches suggests that the ‘passive’ players know this.
At Harbourside we follow a multi-factor rules based systematic approach to investing. We invest in concentrated portfolios that meet our investment rules. We find that this approach enables us to identify and invest in the ‘best of the best’.
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