Active or passive?

Traditionally there are two main investment strategies that you are likely to encounter – active management and passive management – and debate has raged over the years as to which is the most effective way to invest your money.

The assets of “active” funds are managed with the aim of delivering a return that is superior to the market in which it is investing. This “active” management takes the form of changing the weighting in individual companies, sectors or even geographic locations in order to expose you to growth or shield you from potential losses.

Typically the management teams behind such funds have extensive access to research in different markets, sectors and often meet with companies to analyse and assess their prospects before deciding to invest.

Also some sectors are better suited to active rather than passive management. Commercial Property or areas such as technology, or emerging markets like China, where expert knowledge can arguably seek out value.

Alternatively “passive” funds involve no stock selection and simply track a market, both upwards and downwards. Investors will capture those companies who are performing superbly but likewise those that could potentially have been avoided by screening them out through a stock selection process. These funds are essentially run by computer and will buy all of the assets in a particular market, to give you a return that reflects how that market is performing. It is also possible, by using traditionally passive investment vehicles such as Exchange Traded Funds, to benefit from a fall in the market; by holding a “short” position that would be more difficult through traditional active management.

So which way is best?

At OCM we understand there are some periods in equity markets when passive strategies perform well and others when active fund managers thrive. The key is therefore to deploy both strategies which we do to best meet our client’s desired “outcome”.

We fundamentally believe the market is inefficient, and we believe we can exploit the market’s inefficiencies to add value by outperforming the market over the longer term. In addition active fund management comes into its own during adverse and more challenging investment conditions. In periods when the market is moving sideways or in decline, an appropriate active fund management strategy can continue to deliver positive returns.

By using our Outcome Based Investment (OBI) strategy we construct investment portfolios and cyclically adjust them by blending different investments throughout the economic cycle. This essentially allows us to secure as much upside as possible and decrease downside risk within a portfolio. An example of where we may deploy a passive strategy is when markets are falling, and we want to benefit from them falling.

We use what we call ‘Quantamental’ analysis to make our asset allocation decisions, which is a combination of quantitative and fundamental analysis. In its simplest form, this means we evaluate shorter term market movements by analysing charts and a large amount of data but also focus on economic and qualitative factors such as understanding which investments will deliver the best risk adjusted returns over the short, medium and long term.

By understanding market momentum, historical analysis and expected future momentum, we are able to make a judgment on how we expect individual assets to perform in different market conditions; it is this that adds the most significant contribution to performance rather than active or passive management. The best stock picker in the world can only do so much if they are operating within an asset class that is falling sharply, and at OCM we believe that if you are not in the right asset at the right time you are never going to achieve strong performance. The real skill to delivering outperformance is via asset allocation together with a keen eye on downside risk and capital protection, this is what has given OCM the edge over our competitors when it comes to performance.

To conclude, we believe the market is transitioning from a period which has been benign for passive strategies, to one in which active fund managers with a sensible, proven investment approach and an appropriate strategy, can add significant value.

In connection with your affairs you should seek independent investment and financial planning advice. If you would like to discuss your options in more detail, please contact us on 0845 338 1971.

OCM Wealth Management Limited is Authorised and Regulated by the Financial Conduct Authority.