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Active Versus Passive Doesn’t Have to Be Either/Or

Why do so many financial professionals back passive investing to the exclusion of other options? One reason is the financial collapse of 2008. A lot of active managers didn’t “save” investors when they needed saving the most, when markets fell precipitously. A trauma like that is hard to forget. Another reason is the array of new regulatory requirements and legal rulings that have been piling up for plan sponsors of defined benefit or defined contribution pension plans. They make passive options seem “safe” when they may not be. In addition, according to a scorecard released by S&P Dow Jones Indices, two out of three active managers underperformed the S&P 500 benchmark in 2015.

All that seems like good reason to go passive, right? A solely passive portfolio simply rolls with the market, which could be a painful proposition in this year’s volatile environment. However, the choice between active and passive doesn’t have to be either/or. A carefully designed portfolio may very well contain active and passive investments if they make sense in terms of the portfolio goals and an investor’s desired outcome. This approach is known as multi-asset investing, and I believe it is how investors are able to protect against risk and fiduciaries can best fulfill their duties.

To some, “multi-asset investing” might mean simply creating a balanced basket of assets, such as equities, bonds, real estate and emerging market funds. But it goes far beyond that. It not only invests in the usual assets, but it also looks across asset classes, in order to fully assess where a portfolio’s true factor exposures lie. This helps identify additional investing opportunities, such as bank loans, emerging market debt, currency or corporate credit. A passive investment may make the most sense for gaining exposure to certain investment factors, while for others it may be worthwhile to pay for active managers to offer superior insight into individual stocks, bonds or other asset classes.

Multi-asset investing takes those well-designed asset allocations and applies tailored strategies, which can potentially help to add value or protect against specific risks. And this is where active investing often comes into play. It is not about chasing the latest hot trend, but dynamically adjusting investments to adapt to shifting conditions. The goal is a better shot than exclusively passive investors typically have at beating benchmarks.  

Basically, multi-asset investing employs passive in areas that don’t offer much reward, incorporates quasi-passive tactics to access risk premiums in the marketplace, and then takes advantage of sub-advisors to harvest bottom-up issue selection opportunities. And this needs to be done with a dynamic mindset to make sure the portfolio is meeting desired client outcomes as markets and opportunities shift over time.

The active-versus-passive discussion is out of date. It misses the point that there are multiple active decisions that must be made to generate the outcome investors are looking for. This includes the decision on where to go active and where to go passive. But multi-asset investing also requires active decisions in allocating assets, finding the right securities to harvest various risk premiums, hiring the appropriate investment managers and dynamically responding to changing market conditions.

Of course, little is certain in the world of investing. The sharp market corrections we saw early in 2016 came as a surprise to many investment professionals. Such surprises provide opportunities to help investors understand how their portfolios are well positioned to manage the downturns and catch the upswings in the years ahead. Multi-asset investing is one way to achieve that objective.


Jeff Hussey is the global chief investment officer at Russell Investments. He has served in this role since October 2013 and is a member of Russell’s executive committee. 

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