Billed as modernising the active vs passive debate, and an answer for those undecided which route to take, weightings will be flexed in different market conditions.
Allocations to active will be increased when a high percentage of active managers are ahead of the benchmark, and conversely when the numbers are decreasing, it may be time to increase weightings to passives as the prospects of active funds is waning.
“It is often quoted that only 20% of fund managers beat their benchmark, and then not always the same fund managers,” said Simon Brett, Parmenion IM’s chief investment officer.
“It is true that certain markets favour the style of some fund managers at various points in time. However at Parmenion, our research shows that the 20/80 statistic is very misleading.
“The number of active managers beating the index does vary over time and does differ between various markets.”
While cost is a key factor in favour of passive investing, Brett points to the current quantitative easing-led bull market as skewing the landscape for equities.
“QE is indiscriminate in terms of company share price, and the active manager struggles in such an environment as both good and bad companies rise in price terms, providing less opportunity for the active manger to differentiate,” he added.
“This is illustrated by the fund managers in US large cap equity, often considered the most efficient stock market and thus the hardest to beat the index.
“In both the 2000-04 and 2005-09 periods, approximately 60% of active fund managers outperformed their benchmarks, whilst between 2010 and 2014 with QE in full flow this figure dropped to 22%.”
Thus with QE coming to an end in both the US and UK, and with interest rate rises in prospect, he believes that the tailwind behind passives in these markets may be coming to an end.