Advisers ditch plans to shrink active allocations

Financial advisers have backtracked on plans to decrease their active exposure, instead marginally increasing allocations, according to a survey by Natixis Investment Managers.

In 2016, advisers planned to reduce their active allocations to 63%. However, the latest study shows allocations to active strategies have increased in the two years since from 68% to 69%.

Advisers expressed concern about risks inherent in passive investing.

Eight in 10 advisers believed the current market environment favours active management and that the length of the current bull market has made investors complacent about risk. Three-quarters of advisers felt retail investors had a false sense of security about passive investing and were unaware of the risks involved.

The survey surveyed 2,775 financial advisers globally, including 300 in the UK.

Bond worries

Ben Yearsley, director at Shore Financial Planning, said he agreed the market environment is moving in a direction favourable to active funds, after a period of several years where passive has done well.

Yearsley said this is particularly the case for bonds, stating it is an area “wholly unsuited to passive at the best of times” and today is “definitely not the best of times”.

“The easy money has been made over the last few years, in tougher times active management should shine”, he added.

“With massive difference in valuation between domestic and international stocks in the UK, for example, you could see the index moving sideways if this situation reverses yet active could make money in this environment.”

Investor complacency

Passive investments can lead to complacency, according to Investment Quorum CEO Lee Robertson, although he said the active versus passive debate is not a “binary argument”.

Three-quarters (74%) of advisers believe individual investors are unaware of the risks of passive investing, and 73% say individuals have a false sense of security about passive investing, according to the Natixis survey. It also revealed 79% of advisers believe clients don’t even recognise risk until it’s been realised in their investments.

“As we potentially enter more difficult investing conditions it can reasonably be argued that the potential for downside protection against risk is better served by active managers who deliver active share.

“Passive investing has, in some quarters, become conflated with less risk and this is just not true, the arguments for lower investment and the lack alpha managers deliver notwithstanding.”

Forward extrapolation

Wellian Investment Solution’s chief investment officer Richard Philbin said passive investors buy the index regardless of risks and also blindly follow weightings in the index, unlike active investors.

As a company grows, its weight in the index rises, which by default garners a demand for the shares and a higher share price, Philbin said.

He added: “Passive investors do not care for price discovery and will allocate regardless.”

“Investors are very good at extrapolating forward,” Philbin said. “Sure, over the last five or so years, the best investment has been in large cap – driven by QE, low interest rates, a weak currency and overseas earnings. If you are confident these issues will remain, then passive is surely the best route again.” But, if you disagree active is the best approach, he said.

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