[ I N - D E P T H | A C T I V E V S . 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.