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Adviser Workshop: How to blend active and passive funds

Adviser Workshop: How to blend active and passive funds

Andrew Crawford (pictured), Mark Croxford and David Wingar explain what factors influence the mix of active and passive funds in their client investment portfolios.

Andrew Crawford

Director, GreenSky Wealth

There are few active managers we have confidence in. We have funds split 50/50 between active and passive in our model portfolios.

Using passives has the benefit of reducing the cost to the client in terms of the total expense ratio (TER).

If we are using trackers, for example, for the passive side of things, it gives us the flexibility to tweak things at short notice.

The advantage is that we can move in and out of sectors without doing a huge amount of research into fund managers who are into those particular sectors. We find that good fund managers are a rarity and it enables us to get exposure without having to compromise.

Horses for courses

The mix varies according to the client. Our model portfolios tend to be half and half active and passive. It is a starting point but that balance is generally maintained. Having said that, in our highest equity weight portfolio at the moment the split is about 55% active and 45% passive.

This is because our active managers are performing well and there is no reason to switch out of those funds. Also we have just moved out of a tracker and into the recently launched Fundsmith Emerging Markets Trust. We are increasing costs slightly but we think that is going to have substantial benefit in the longer term.

We try and treat all our clients in the same way, regardless of their assets.

Mark Croxford

Partner, Plutus Wealth Management

We would not segment into active and passive funds based on the amount of assets a client has.

We offer a range of risk-rated model portfolios which we run in-house. The ideal split would be 50/50 between active and passive, but we have been more like 60/40 in favour of active. At the moment we are probably 70/30.

We have a coupling strategy, so that for every passive fund in a sector we also have an active fund.

Passive route

Passives can be great in a rising market such as the US equities market. Also in North America a lot of funds fail to outperform their index, so if you can get a BlackRock or a Vanguard fund for 15 basis points that is good for bringing the TER down.

The US passive fund has been good on the upside; the active fund gives us more downside protection.

In Asia we had an active and passive fund, but the active fund’s performance was better throughout the period.

We are 70/30 to active across portfolios largely because of the strong performance of managers like [Schroders’] Julie Dean and [Neptune’s] Mark Martin.

We are great believers that regardless of how much money you have you should get the same amount of service.

Naturally though if there are large clients that want something specific then we are not going to shoot ourselves in the foot. We will try to help them.

Big spender

One client came along and said he just wanted to buy passive portfolios. We talked through his reasons for why he wanted that and made him answer questions to see whether he had really thought it through. He had, so we were more than happy to only use passive funds for that client.

It is not our investment philosophy but we are not going to turn down a client who offers us over £1 million.

David Wingar

Managing partner, Future Asset Management

We do not talk in terms of active and passive. We talk in terms of actively managing a client portfolio in which the discretionary fund managers might choose to put passive funds if active funds do not add value.

The portfolios that cause me concern are the 100% passive ones. The only reason for doing that is to save costs. Depending on what research they are looking at, all they are saving is a few basis points. They are saying they do not think fund managers add value but I think they do.

It is about quality. No clients have ever asked me for a cheaper portfolio. They come to me for a service. If they are engaging with me it is because they think that is what is appropriate for their circumstances.

Continuous dialogue

Part of my investment process is that I am constantly speaking to different providers and fund managers to see if I am missing out on anything. But I will not switch to a new fund just because it is cheaper.

I use bespoke discretionary fund managers and most of our clients are in model portfolios run on an outsourced basis.

We use three different model portfolio services which have mixture of active and passive funds. We also invest some clients in a fund of funds.

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