Passive investment clearly has its place in portfolio construction but is like a "blunt instrument" if used in isolation, Goldman Sachs Asset Management (GSAM) portfolio manager David Copsey has warned.
Copsey was participating in a multi-asset panel discussion at the 2016 RSMR Investment Conference, where the discussion focused on whether asset allocation was still 'king' and the relative merits of active and passive investment - an issue that has resurfaced following the publication of the Asset Management Market Study by the Financial Conduct Authority (FCA).
On the role of passive vehicles in a portfolio, Copsey said: "To claim you are managing risk in a holistic portfolio and yet allow the markets to dictate how much you are going to hold of something - that is somewhat difficult.
"Using passive on its own is a blunt instrument - and using it as your only instrument can be tough - though clearly you can use passive within a portfolio. On active versus passive, therefore, I would sit in the middle of that argument and mediate."
For his part, BMO Global Asset Management senior product specialist Lars Neilson said: "The premise of the FCA paper seems to be 'wouldn't it be great if we all invested in passives?' - and there is nothing new in that.
"One of the most difficult things for investors is to find a fund manager who will outperform on a consistent basis. For many, then, it can make sense to look at passive because while they know managers and will can outperform, it is hard to pick them in advance."
Nielsen was, however, keen to highlight one misconception repeated in the first few pages of the FCA report - that by buying the average of active managers and subtracting the active fee, investors will end up with passive.
He also argued the belief that running a 0% tracking error on a fund would help avoid risk was wrong, explaining: "The way we look at risk is as the risk of losing money - so avoid too much leverage and paying too much for whatever asset class you're in."
Legal & General Investment Management head of multi-asset funds John Roe agreed, adding: "To say tracking error is a good measure of risk is nonsense - it is one of the biggest disservices to the investment company."
Copsey offered another take here, saying: "Being aware of the downside is important but being an eternal bear and finding reasons you should hide money under your mattress while allowing inflation to erode its value is what makes a guaranteed loss."
For GSAM, he said, it was more about looking at the macroeconomic environment and having a framework for the economic cycle, which can really drive the returns to different asset classes.
He added: "Really the benefit of being invested in multi-asset, is that you can access unique underlying risk by adding different types of asset classes."
On the question of added value, Roe said: "While I believe a good asset manager can add value, I would go back to the FCA's leading conclusion that it's asset allocation and client outcomes that add the most value."
He referred to a statistic in the FCA study that suggested 89% of investment returns are driven by asset allocation. In the context of the paper's questioning of the value of active fund managers, he added, the conclusion was "unsurprising".
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