Colin McInnes: Brunel Chief Investment Officer
Active vs Passive investment
Colin McInnes is Chief Investment Officer, Brunel Wealth Management and Managing Partner, Quartet Capital Partners LLP
Whilst Brunel Wealth Management manages its own portfolios, Quartet provides the research and fund selection resource to Brunel. Colin sits on the Brunel Wealth Management Investment Committee that oversees all investment decisions made as we construct our and our clients’ investment portfolios. Other members of the Brunel Wealth Management Investment Committee include Steve Brady, Brunel Director; Dan Hiles, Brunel Chartered Financial Planner; and Andrew Weston, Brunel Compliance & Technical Manager.
Here Colin talks about the Brunel Investment Strategy. Described as ‘systematic, globally diversified & low cost’, it is also an investment style that can be described as ‘passive’ rather than ‘active’. But passive doesn’t mean in-active.
Active Management is what most investors expect
It’s an investment strategy that:
- Aims to outperform the market by selecting some investments (bonds or equities) in preference to others
- Believes research will uncover hidden value or cheap assets and avoid expensive ones
- Carries higher costs as managers charge fees and incur transaction costs
Passive Management is far more measured
A passive investment strategy:
- Tracks a specific index (e.g. FTSE 100) and reflects the market as a whole. It’s important to note that indices are active… bad performers get cut and more successful ones are switched in
- Carries lower costs as transactions are limited and there is a lower management fee
- Aims to gather whole market value, not to outperform the index/market.
Brunel takes the approach that the starting position in its core satellite portfolios is a passive position and that only if there is a compelling argument for an active fund over a passive one will it be included.
Over a recent 10-year period, active mutual fund managers’ returns trailed passive funds consistently
This is according to Kent Smetters, a Professor of Business Economics at Wharton Business School, Pennsylvania. Managers of stock funds for large- and mid-sized companies produced lower returns than their index competitors 97% of the time, while managers of small-cap stocks trailed 77% of the time.
Those very few investment managers that outperformed the passive index were still likely to underperform in the future. In fact, outperformers had only a 20% chance of repeating the following year, and … just a 10% chance of outperforming three years in a row.
It’s just too hard for an asset manager to pick a portfolio that outperforms the market by enough to make up for the 1, 2 or 3% fee that must be charged to support the stock and bond picking operation.
Many index-style mutual funds and exchange-traded funds charge less than 0.2%, some less than 0.1%, giving them a huge cost advantage.
The importance of staying invested
Most investors are not good at predicting short-term swings in the market. More often than not, investors find themselves buying high and selling low.
When the market starts selling off sharply, investors will panic, sell their own shares, and sit on the sidelines.
Unfortunately, some of the biggest one-day upswings in the market occur during these volatile periods. For instance, if an investor stayed fully invested in the S&P 500 from 1993 to 2013, they would’ve had a 9.2% annualised return.
However, if trading resulted in them missing just the ten best days during that same period, then those annualized returns would collapse to 5.4%!
Portfolio diversification plays a key role in passive investing and is a widely embraced investment strategy that helps mitigate the unpredictability of markets for investors. It has the key benefits of reducing portfolio loss and volatility and is especially important during times of increased uncertainty.
Modern Portfolio Theory, provides the academic bedrock for diversifying portfolios. Simply stated, by combining assets that are not perfectly correlated, that is, do not move in perfect lock-step together, the risks embedded in a portfolio are lowered and higher risk-adjusted returns can be achieved. The lower the correlation between assets, the greater the reduction in risk that can be derived.
Chief Investment Officer, Brunel Wealth Management and Managing Partner, Quartet
Colin has over 18 years’ investment management experience and founded Quartet in 2009. Before this Colin was a board director at the UK arm of a Swiss Private Bank where he oversaw the portfolio management function. He holds the Investment Management Certificate and the Chartered Institute of Securities and Investment Diploma. Colin is a Chartered Wealth Manager and a Chartered Fellow of the Institute of Securities and Investment. Quartet is a discretionary investment management firm managing bespoke portfolios for individuals and providing research and fund selection resources to firms who manage their own portfolios such as Brunel Wealth Management.