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A C T I V E
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PA S S I V E ]
ual trader using “rudimentary” tools
such as Excel spreadsheets. “Katana”,
the Japanese word for sword, was first
used to give ING’s own market makers
a fast overview of market conditions. In
a real-time environment, “every second
that is saved in scanning for that infor-
mation is valuable,” Braje says.
Traders are supported by and con-
trol the technology rather than being
replaced by it, he argues.”The universe
is simply too big” in terms of available
tradeable securities, and “Katana”
can quickly reduce that universe to a
manageable size. Braje says that this
is where the prototype can add most
- NICHOLAS EDWARDS, CEO, ALTERNATIVE
ASSET MANAGEMENT
value. As well as developing a tool
with a large active asset manager cli-
ent, ING is also in discussions to apply
the technology for a passive manager,
where Braje believes it can be used to
improve the efficiency of execution.
Braje expects that the prototype can
be turned into a working system for
clients within a few months.
A false dichotomy
Passive investment does not equate
to passive investors. Such investors
continue to control holding periods,
and these can be much shorter than
might be expected. Epoch Investment
Partners calculate an average holding
period of less than nine days for the
SPDR S&P 500 exchange-traded fund,
42 // TheTrade // Summer 2018
the largest on the market, in 2016. It seems more use-
ful to think of active and passive as points on a relative
scale, rather than as opposing strategies.
The question, as for the Vanguard index-tracking pi-
oneers of the 1970s, is ultimately about fees, and trust.
The only tangible forward-looking certainty about a
fund is its cost: Investors don’t have anything else that
they can be sure about. A lack of trust arises when an
active manager charging high fees achieves returns
that look like those of a closet tracker.
According to James Soººre, chief investment officer
of Syndicate Room in Cambridge, UK, one of the most
important factors fuelling the continued rise of passive
index investing is the “huge pressure to create accurate,
comprehensible and comparable disclosure of fees. Sore
is fund manager at Fund Twenty8, which claims to be
the only passive fund for early-stage investing.
“Post-fee performance comparisons have exposed
a persistent underperformance of actively managed
funds compared to passive. Furthermore, a number of
actively managed funds were not clearly demonstrat-
ing their total fees – top-line fees were competitive but
excluded other, less visible fees. Active managers need
to deliver value for fees.It is that simple,” he argues.
Passive investors, then, are active investors who
have found a way to reduce costs. Sore predicts that
“as fund performance comparisons become more
intelligible, the true champion active funds will begin
to shine and attract an increasing amount of capital
and those that fail consistently to beat passive funds
will die away. That leads to a less volatile and varied
actively managed funds market, but one that actually
delivers value.”
After all, investors wanting to avoid assets that may
at times be overvalued by any objective measure have
only two choices: active management, or avoiding the
market altogether. Morningstar data shows that active
clearly outperformed passive during the market crash-
es of 2000-02 and 2007-09.
All this suggests that there is something artificial
and misleading in the distinction between active and
passive. A decision to t rack an index, after all, still in-
volves an active decision to purchase the securities in
that index. There are few, if any, passive investors who
have a portfolio that accurately weights all globally
investable assets. Many funds track a local benchmark
index – a clear piece of active asset allocation. There
seems no obvious reason to assume that an investor
who is reluctant to pick individual securities will be
any better at asset allocation. Ultimately, technology is
open-ended and will serve whichever trading style is
cleverest in embracing it.