In this contributed article, Cambridge Associates managing director Andre Abrantes encourages investors to reject an oversimplified framework applied to the active versus passive debate, because the reality is that all investing requires active decision making. Some of the key points that Abrantes expands upon in this article include:
- It’s important to note the wide range of active decisions that are embedded in the seemingly simple and benign decision to pursue a passive index approach.
- An individual investor must carefully consider his context and knowledge level and make one of his most critical decisions—to determine who’ll serve as the active manager making these decisions in investment strategy.
- Investment costs, including manager fees, trading costs and taxes, are a critical component impacting performance. Investors [should] consider costs as one component of an investment decision and focus on total performance, net of fees, as the primary objective, instead of simply seeking minimal costs.
- At its core, investing is a critical component of capitalism – a mechanism for savers to funnel money into new opportunities for growth within the economy. In a world of 100 percent indexing, if implemented in its current approach, capital would be funneled to companies regardless of fundamental needs or merit, simply because of their historical sizing within an index.
Andres emphasizes that investors should consider their investment strategy carefully, including the benefits and challenges of implementation across indexing, traditional stock-picking or various permutations in between, and determine the appropriate solution for their portfolio, based on their context and level of resources. Four recommendations for investors to do this are:
- Design an overarching investment strategy to meet your objectives;
- Determine what level of active management to engage in;
- Identify who should be responsible for the active decision making; and
- Match costs with the selected investment approach