Active versus Passive Investment Management

Octagon uses its active approach to enhance the returns available from investing in markets – be they cash, fixed interest, property or equity markets and even foreign currency markets.

Octagon believes that a disciplined investment process that focuses on the reasons why markets may not always accurately price assets on their fair value can lead to superior returns over time. The process of identifying and understanding any mispricing is critical to what we do. With an understanding of why mispricing may occur, and a discipline that allows you to take advantage of under or over valued assets, we believe active management can enhance investment returns.

It is always useful to start with a definition in investment markets. Active management means being “different” to the market. Being “different” is what creates the opportunity to beat the market return – but it also creates the risk of earning returns that are lower than the market. Passive on the other hand means investing in exactly what the market owns, in exactly the same proportions. Taking fees into account, you will never beat the market, as you're simply mirroring what the market in question holds. By doing this you will never beat the market. This is because while your returns might match the market, fees still need to be deducted, meaning your actual return is less than the market.

I give two very high level examples here of why we think active management can enhance market returns. In February this year, the Japanese stock market set a new record high level. The remarkable thing about that is that it last set a record high in 1989, 35 years ago. In 1989, if you had been a passive investor in global equities, your biggest allocation would have been to the Japanese stock market. Over the last 35 years you have had zero return from that market.