Insync uncovers flaws in passive versus active debate

Insync Head of Strategy and Distribution, Grant Pearson, has written a White Paper which gives seven key factors in portfolio construction that demand full consideration before assuming the powerful marketing messages from index managers are relevant or correct.

1. Blending 2-3 active funds often does better than an index fund 
If devised properly by trained professionals, two to three active funds blended often do better than an index fund. Most investors using active managed funds tend to use a composite of them with various weightings that also shift over time. Intermediated inputs of some form are present in a very large portion of all active funds under management (FUM), be it model portfolios or forms of advised recommendations.

"This is a valuable layer of skill that impacts the reality for end investors," Pearson says. "Excluding this fact infers that such inputs and professionals offer zero value to the outcome. However, the evidence suggests they do add value."

2. Applying meaningful time-based measurements
Rolling Returns instead of commonly used point-to-point returns provide investors with far more useful assessments of historical returns, as they better account for the average result across all start/end months of the year, thus aligning an investor’s likely return experience.

"Index promoters and researchers have avoided using this superior measure of returns," Pearson says.

3. Challenging the over-simplification of index comparisons 
Using almost any month of ‘point-to-point’ returns, a cohort of 10-20% of active funds usually outperforms the relevant index fund.

"This is especially so outside extreme frothy markets," Pearson says.

4. Measure active returns, risk adjusted and in the hip-pocket
Active management is only accurately calculated at the investor’s dollar account level, not at the fund level because risk and volatility management are provided with active management, and this alters the dollar-based account balance.

"Two funds can post the same return ‘point-to-point’ yet have very different account balances simply due to the volatility in each. How often, how far and for how long a fund drawdown is, impacts account balances," Pearson says.