Active and Passive Investing: The Case For Both
We all make choices, saying yes to some exposures and strategies and no to others. That’s why, at Russell Investments, we believe in active AND passive investing. Decades of asset allocation expertise help us objectively recognize there are appropriate situations, market cycles, and circumstances for both.
We also believe savvy investors take advantage of the wide-and-deep toolkit that multi-asset investing provides. And we believe the best plan is not to follow trends, but to focus on proven, research-based strategies that give investors the highest likelihood of reaching their outcomes.
Active management is more than just stock picking in a single asset class. Active management utilizes all the tools available to achieve an outcome for investors. Investors who choose to miss out on active management run the risk of missing out on the many benefits that can come with it.
Asset Allocation
Active management includes vital allocation decisions that can have far greater impacts than just the cost of fees. The fee difference between active and passive is often small enough to be measured in basis points. Meanwhile, studies suggest that more than 90 percent1 of the variation in investor’s return is determined by asset allocation. But these days, with so many relatively new ways to achieve specific factor or sector exposures, how do you know what to choose? Bank loans, REITs, infrastructure, low vol, momentum, emerging markets? When do you lean in? When do you lean out? What combination of asset classes is most likely to deliver the return you need at the risk you can live with? An asset-allocated, actively-managed investment approach can help.
Dynamic Management
Active management looks forward, while passive investing, by its very nature of tracking with the market, tends to follow what worked. Think back on the past 12 months. Are you confident passive investing takes advantage of some of the rapid market swings that hit investors? Dynamic active management can be used to help avoid downside risk in chosen asset allocations. And the smoother ride that active management works to create can help to keep investors from exiting the market at the worst possible time.
Precise Factor Exposures
Every investor has a unique situation. Some require a defensive position, aimed at reducing downside risk. Others want growth amplified, whether in their home country large-cap equity exposure or in varied market sectors. And we believe that the more varied or less covered the asset type, the less likely that sector has the maturity and predictability to merit a long-term passive allocation. At Russell Investments, we handselect active managers around the world—with research-proven expertise in local, specialized market sectors, including emerging markets, alternatives, infrastructure, and more.
After-Tax Returns
It’s not what an investor earns. It’s what they keep. Actively managing to reduce tax burdens is an under-appreciated way active managers can help to provide value. Unlike index-based passive investing, active management can use an expanded toolkit to actively seek to maximize after-tax returns. This includes active loss harvesting—potentially increasing the absolute return an investor sees. Passive means passive, not just in regards to investing, but it may be passive in regards to taxes as well. Active, by its very nature, strives to do better.