Active or passive: Eelco Ubbels, Astrid Smit & Frank Dankers (Alpha Research NL)
This article was originally written in Dutch. This is an English translation
By Eelco Ubbels, Founder, Asset Allocation Specialist, Alpha Research NL, Astrid Smit, Investment Strategist, Alpha Research NL & Frank Dankers, Analist, Alpha Research NL
Being active in both asset allocation and fund selection often leads to friction.
To what extent are passive strategies appropriate in a volatile and inflation-sensitive market?
‘In the debate about active versus passive investing, it is worth first looking at the playing field. To clearly distinguish the possible choices, the components of asset allocation and fund selection are placed in a quadrant below. There are four possible combinations of asset allocation and fund selection: active allocation and actively managed funds, active allocation with passive funds, passive allocation with active funds and passive allocation with passive funds. Each approach requires different skills – and above all, a clear vision of where you add value as an organisation.
Being active in both areas (#1) – allocation and fund selection – sounds attractive, but often leads to friction. Consider a good asset allocation decision, where the selected active funds still underperform. With actively managed funds, a longer investment horizon is crucial, but this is difficult to reconcile with regular changes in allocation. You cannot be both a goalkeeper and a striker. Focus is crucial.
At the same time, passive allocation + passive management (#4) is very relaxed: the allocation is fixed and you rely entirely on what the indices offer – including concentration risks, weightings based on market capitalisation and sector biases. However, this approach may overlook the question of whether certain asset classes can still deliver sufficient returns (e.g. in the event of very low interest rates or high valuations) and whether concentration risks are not becoming too great with the market cap approach. It is like automatically selecting a football team without analysing the opponent and without checking who is fit.
That is why combination strategies are often used in practice:
• Active asset allocation with passive implementation via ETFs (#2) – tactically responding to macro themes such as inflation, geopolitics or interest rates, without being dependent on individual fund managers.
• Or passive allocation with active selection (#3) – long-term portfolios built around carefully selected funds.
If, as an investor, you want to respond to market volatility and the theme of inflation, steering at the allocation level is often more effective than focusing on fund selection. This argues in favour of strategy #2. But the key question you always have to ask yourself is: where do my skills lie? Know what you and your team are good at, know the rules of the game, make your choices – and don't try to do everything at once.
