A broad and varied array of passive investments are available
via the Novia platform. These range from tracker funds managed by a
number of large and well known investment houses and smaller
boutiques to Exchange Traded Funds (ETFs) from some of the world's
biggest providers. These investments can play an important role for
both adviser and client when constructing an investment strategy
and portfolio to suit a range of individual profiles.
Using passive investments can have great benefits but is by no
means the only option available - so what is passive investing and
what are the potential pros and cons?
Q / What are
Passive Investments and what is the theory behind
them?
A /
Passive investments such as tracker funds or ETFs aim to deliver
market returns - they follow or 'track' an index or sector and seek
to provide the same level of performance as that market. Management
of the fund is based on holding the same investments in the same
proportions as the underlying index or sector - therefore providing
matched performance.
This is known as passive management - for example a passive fund
may be a FTSE 100 Tracker - the fund will be made up of the FTSE
100 constituents and will generate similar returns. Any, usually
small, deviation in performance from the underlying index is known
as 'tracking error' and this is one way to judge the performance of
a passive manager.
Q / What's the
theory behind passive management?
A /
Passive management's theoretical basis is that it is difficult or
impossible to outperform the market, ie that the market is always
efficiently priced. Therefore it is not possible for active
managers to consistently deliver increased returns over and above
that of the market. It can therefore be argued that it is better to
select funds that closely track different markets and use asset
allocation analysis to select which of these markets and in what
proportions a portfolio should follow. Model Portfolio Theory
argues that asset allocation and not fund selection is the major
determinant of risk adjusted performance.
Q / How does
passive management differ from active management?
A / Whilst
passive management seeks to provide the same returns as an
underlying market active managers seek to outperform the market and
deliver excess returns. These excess risk adjusted returns, over
and above the market return are known as alpha, and this measure is
a key way to judge an actively managed investment. Active
management is based on the belief that the impact of an informed
and talented investment manager with skills in stock selection and
market timing can deliver returns
Q / How can I
evaluate the performance of a passive manager?
A /
Clearly the impact a passive manager can have on performance is
limited and cannot be judged in a similar fashion to active
managers. The job of the manager is to track the underlying index
as closely and efficiently as possible - delivering the same level
of performance as the chosen benchmark. Tracking error, a measure
of how well the underlying index is replicated provides a way to
judge the performance of a passive manager. All of the passive
investments available through Novia can be evaluated using the
research tools made available through the service.
Q / What can Novia
offer?
A / Please
see the
Investments List for full details of the investments available
through the service.
Through Novia you can utilise a broad range of tracker funds,
often with access at very low cost, covering numerous markets and
indices across different asset classes and regions of the
world.
These are unit trusts or OEICs which hold stocks matching an
equity, bond or property index, usually with no initial charge and
low annual management charges typically ranging from 0.20% to
0.90%.
We offer passively managed funds from many providers, including
for example Vanguard, L&G, HSBC and M&G.
- Exchange Traded Funds (ETFs)
Novia offers access to a very large number of ETFs from many
major providers. These are stock exchange traded funds which track
a vast array of indices and markets around the world. They are
usually low cost with annual management charges typically ranging
from 0.25% to 1%.
ETFs from providers such as BlackRock iShares, ETF Securities
and DB x-trackers can be traded on an aggregated basis through the
Novia or the wide range of sterling denominated ETFs on the LSE can
be traded via a Novia Stocktrade account.
Charges for the trading of ETFs will apply, details of which are available in the Key
Features document.
Q / What are the
pros and cons of passive investing?
A /
To an extent the answer to this depends on your view of passive v
active investment. Novia does not offer advice but makes both
active and passive investments available.
- If you believe that active
managers cannot consistently outperform the market, the cost does
not equal any added value and asset allocation is more improtant
you may choose to use passive investments for some or all of a
portfolio.
- If you do believe that active
managers can justify the cost through added excess return then the
vast array of actively managed funds are available. It is also
possible to argue that the selection of managers is the key point
here and that the best can indeed outperform
consistently.
- Many advisers may choose to use a
mix of active and passive investments, often through an approach
known as 'core and satellite' or 'hub and spoke
investment'
Q / What is a core
and satellite strategy?
A / This
is an investment strategy that involves a core element of usually
passively managed investments covering the selected risk
appropriate asset allocation and a percentage of selected
individual investments known as satellites. These may be actively
managed investments to provide extra added return or to cover
specific markets or trends required.
The core typically constitutes the major part of the portfolio,
normally 60% to 80% and would remain relatively static. The
number of Satellite investments can be whatever the client is
comfortable with and would be more actively managed. They may
be changed more frequently than the core investments as they would
be used to time the market or exploit short term anomalies or
trends.
The satellite investments are typically concentrated, actively
managed funds with no particular benchmark to track but focussing
on delivering high returns, however, they can also be passive
funds, ETFs or individual shares used to 'tilt' the core to a
particular sector, region, style etc. Satellite investments
are usually higher risk and have higher fees than typical actively
managed but broadly based funds.
The jargon often used is that the core is delivering Beta return
whilst the satellite investments may generate additional Alpha
returns. Beta provides a measure of how an investment follows and
delivers the risk/return profile of the wider market.
