Rigid focus on cost a false economy in active/passive debate 19 May 2016


There is an overriding focus on cost rather than value at work within the financial services sector, says Jason Broomer, head of investment at Square Mile Investment Consulting and Research.

Rigid focus on cost a false economy in active/passive debate


Speaking at Portfolio Adviser’s UK Equity event in London on Tuesday, Broomer said this focus on cost has been a major part of the significant growth in passive funds over the period. Indeed, he pointed out, passive funds now account for 30% of the UK investment market.

But, he added, there is the danger that too much focus on cost is a false economy, especially in the UK equity market, which he said was one of the easier sectors in which to find good active managers.

Pointing to a graph of the rolling three year monthly performance of the UK All Companies Sector compared to those of the FTSE All Share, he said in the past three years, investors in active funds have done significantly better than the index.

One of the reasons for this he said, is the natural bias toward small and mid caps that active managers tend to have.

“When small caps outperform it gives active managers a tailwind, this has been true for a very long time. Which begs the question, why would you wedge yourself to a passive strategy when active funds have had such as strong following wind for so long?”

He did add, however, that while there has been a significant move toward passive funds, given the current environment, there has also been a pick up in high alpha UK active funds. 

Written by Geoff Candy and published on the portfolio-adviser.com website on the 18th May 2016